Every rupee note in a citizen's wallet carries a promise printed by statute: a guarantee by the Central Government and a sole monopoly of issue vested in the Reserve Bank. The chapter of the RBI Act dealing with the Bank's functions reaches its constitutional crescendo in the provisions on currency — Sections 22 to 39 — which convert paper into legal tender, separate the Issue Department from ordinary banking, and arm the State with the power to demonetise. Two Supreme Court benches, in 1996 and 2023, have tested those provisions against the fundamental right to property and the doctrine of excessive delegation. This chapter sets out the bare law, traces it through the case law, and shows why Vivek Narayan Sharma reopened questions Jayantilal Ratanchand Shah was thought to have settled.

The statutory scheme of currency regulation

The Reserve Bank of India Act, 1934 devotes its third chapter — Sections 22 to 39 — to “Central Banking Functions,” and within it the cluster on note issue forms the legal backbone of Indian currency. The architecture is deliberate. Section 22 confers a monopoly; Sections 23 to 25 organise how that monopoly is exercised; Section 26 invests notes with the quality of legal tender and embeds the demonetisation power; Sections 27 to 31 police the integrity of the currency; and Sections 33 to 34 prescribe the backing of assets against which notes may be issued. To read the currency provisions in isolation is to miss their purpose — they operationalise the very reason the Bank was established in 1934: “to regulate the issue of Bank notes and the keeping of reserves with a view to securing monetary stability in India,” as the long title of the Act records.

The scheme reflects a historical transition. Before 1935 the Government of India itself issued currency notes under the Paper Currency Act, 1923. The RBI Act transferred that function to the new central bank, and Section 22 marks the moment the State surrendered direct note issue to an institution designed for monetary management. Understanding this handover is essential because the demonetisation litigation of 2023 turned precisely on the residual role the Central Government retains over a currency it no longer prints. For the foundational context of the Act and its objects, see the Banking Regulation Act and RBI Act hub.

Section 22 — the Bank's sole right to issue notes

Section 22(1) is the cornerstone: “The Bank shall have the sole right to issue bank notes in India, and may, for a period which shall be fixed by the Central Government on the recommendation of the Central Board, issue currency notes of the Government of India.” The provision creates a statutory monopoly. No private bank, no state, and — after the appointed day — not even the Central Government may issue bank notes in competition with the Reserve Bank. Section 22(2) reinforces this by providing that on and from the date the section came into force, the Central Government shall not issue any currency notes save through the Bank.

The monopoly is not absolute in a curious respect: one-rupee notes and coins, along with subsidiary coins, remain the preserve of the Central Government, issued under the Coinage Act, 2011 and merely distributed by the Bank as the Government's agent. The line between “bank notes” (Reserve Bank) and “currency notes and coins” (Government) is therefore a live distinction in the statute, not a mere drafting flourish. The significance of Section 22 is that it makes the Reserve Bank the sole issuing authority, and consequently the sole institution whose Issue Department must hold the backing assets prescribed by Section 33 — a topic developed in the dedicated chapter on the issue of bank notes.

Sections 23–25 — the Issue Department, denominations, form and design

Section 23 commands that the issue of bank notes “shall be conducted by the Bank in an Issue Department which shall be separated and kept wholly distinct from the Banking Department.” This is no accounting nicety. The separation insulates the assets backing the currency from the ordinary commercial liabilities of the Bank, so that note-holders are protected even if the Banking Department's operations falter. The assets of the Issue Department, Section 23 adds, shall not be subject to any liability other than the liabilities of the Issue Department defined in Section 34 (which counts the total notes in circulation as the principal liability).

Section 24 governs denominations. Bank notes “shall be of the denominational values of two rupees, five rupees, ten rupees, twenty rupees, fifty rupees, one hundred rupees, five hundred rupees, one thousand rupees, five thousand rupees and ten thousand rupees or of such other denominational values, not exceeding ten thousand rupees, as the Central Government may, on the recommendation of the Central Board, specify.” The 2,000-rupee note introduced in November 2016 was issued under this very power, exercised on the Central Board's recommendation, after the legal-tender status of the existing 500 and 1,000 rupee notes was withdrawn. The same denominational power was again in view in May 2023, when the Reserve Bank announced the withdrawal of the 2,000-rupee note from circulation while it remained, for the time being, legal tender — a reminder that issuing, withdrawing and demonetising a denomination are three legally distinct acts resting on different sub-sections. Notably, the statutory ceiling fixes the maximum denominational value at ten thousand rupees; the Central Government may add or vary denominations only within that cap and only on the Central Board's recommendation, so the Bank's expert advice is a precondition to any change in the very units in which the nation reckons money. Section 25 provides that the design, form and material of bank notes “shall be such as may be approved by the Central Government after consideration of the recommendations made by the Central Board.” Note the consistent statutory motif: the Bank recommends, the Government approves — a division of labour that became decisive in the demonetisation debate over Section 26(2).

Section 26(1) is the clause that turns paper into money: “Subject to the provisions of sub-section (2), every bank note shall be legal tender at any place in India in payment or on account for the amount expressed therein, and shall be guaranteed by the Central Government.” Two distinct legal consequences flow from this. First, a creditor cannot refuse a tender of bank notes in discharge of a debt expressed in rupees — the notes are legal tender for any amount, unlimited. Second, the obligation behind the note is the Central Government's guarantee, which means a bank note represents a debt owed by the State to the holder. That characterisation is not academic; it is the very feature that made demonetisation a deprivation of property requiring legislative sanction, as the Supreme Court held in Jayantilal Ratanchand Shah.

Coins occupy a different regime. Under the Coinage Act, 2011, coins are legal tender only up to ceilings — a rupee coin and above for sums not exceeding one thousand rupees, and a fifty-paise coin for sums not exceeding ten rupees — so a creditor may lawfully refuse coins beyond those limits. Bank notes, by contrast, carry no such cap. This contrast — unlimited legal tender for notes, limited for coins — is a favourite of judiciary examiners and is best understood by reading Section 26(1) alongside Section 6 of the Coinage Act.

Section 26(2) — the demonetisation power

The exception in Section 26(1) is Section 26(2), the demonetisation clause: “On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender save at such office or agency of the Bank and to such extent as may be specified in the notification.” The structure is a chain of conditions — a recommendation by the Central Board, followed by a Central Government notification — and the litigation of 2023 dissected every link in that chain.

Three interpretive questions lurk in the text. First, what does “any series” mean — a particular series, or all series of a denomination at once? Second, can the executive act on the strength of a Gazette notification alone, or does extinguishing the legal-tender status of the bulk of a nation's currency require Parliamentary legislation? Third, must the “recommendation” originate independently with the Reserve Bank, or may the Central Government initiate the proposal and obtain the Bank's concurrence? Each question divided the Constitution Bench in Vivek Narayan Sharma v. Union of India, examined below. The 1978 demonetisation, by contrast, was carried out not under Section 26(2) at all but by a separate statute — the High Denomination Bank Notes (Demonetisation) Act, 1978 — a difference of method that explains why the two cases reach the issue from opposite directions.

Jayantilal Ratanchand Shah v. RBI — demonetisation as deprivation of property

In Jayantilal Ratanchand Shah v. Reserve Bank of India, AIR 1997 SC 370 (decided 9 August 1996), the Supreme Court tested the High Denomination Bank Notes (Demonetisation) Act, 1978, which had withdrawn the legal-tender status of 1,000, 5,000 and 10,000 rupee notes with effect from 16 January 1978. The petitioners contended that the Act compulsorily acquired their property — the value embodied in the notes — without adequate compensation and on unreasonable exchange conditions, violating their fundamental rights.

The Court delivered two propositions of lasting importance. First, it accepted that a bank note represents a public debt owed by the State to the holder, so that demonetisation, by extinguishing that debt, amounts to a deprivation of property — and such deprivation can be effected only by authority of law. The 1978 demonetisation passed muster precisely because it was carried out by a statute enacted by Parliament (replacing an earlier Ordinance), not by mere executive fiat. Second, the Court found the time and manner prescribed for exchanging the demonetised notes to be neither unreasonable nor unjust, and accordingly upheld the Act and dismissed the Article 32 petitions. Jayantilal thus stood for the principle that demonetisation is constitutionally permissible but must rest on a valid legal foundation — a principle that set the stage for the very different controversy in 2016, where the foundation relied upon was Section 26(2) rather than a fresh statute.

Vivek Narayan Sharma v. Union of India — the 2016 demonetisation challenge

On 8 November 2016 the Central Government issued a notification under Section 26(2) declaring that, with effect from midnight, all bank notes of the 500 and 1,000 rupee denominations of the Mahatma Gandhi series would cease to be legal tender. A wave of writ petitions followed, the lead matter being Vivek Narayan Sharma v. Union of India, (2023) 3 SCC 1, Writ Petition (Civil) No. 906 of 2016. The challenge was heard by a five-judge Constitution Bench — Justices S. Abdul Nazeer, B.R. Gavai, A.S. Bopanna, V. Ramasubramanian and B.V. Nagarathna — and decided on 2 January 2023 by a majority of 4:1.

The petitioners' principal arguments mapped onto the three interpretive questions latent in Section 26(2). They contended that the phrase “any series” could not authorise the wholesale demonetisation of all series of a denomination; that withdrawing the legal-tender status of 86% of the currency in circulation required Parliamentary legislation, as in 1978, and could not be achieved by executive notification; and that the “recommendation” of the Central Board had not been an independent initiative of the Reserve Bank but a concurrence to a proposal originating with the Government. They also pressed grounds of disproportionality and of the hardship visited on ordinary citizens.

The majority in Vivek Narayan Sharma — a purposive reading of Section 26(2)

Justice B.R. Gavai, writing for the majority of four, upheld the notification. On the meaning of “any series,” the majority adopted a purposive interpretation: to read “any” as restricting the power to “some but not all” series would produce absurd consequences — leaving, say, one of twenty series in circulation — and would defeat the object of the provision. “Any series of bank notes of any denomination,” the Court held, therefore embraces all series. On the requirement of legislation, the majority held that Section 26(2) itself supplies the legal authority demanded by Jayantilal; a notification issued under a validly enacted statutory power is action “by authority of law,” and no separate Act of Parliament is needed where the legislature has already conferred the power.

On delegation, the Court rejected the argument of excessive delegation, holding that the mandatory requirement of a recommendation by the Central Board operates as an inbuilt safeguard against arbitrary executive action. On the manner in which the recommendation arose, the majority treated the consultative process — some six months of dialogue between the Bank and the Government — as satisfying the statute, holding that demonetisation is not vitiated merely because the proposal emanated from the Central Government. Finally, applying the doctrine of proportionality, the Court found a reasonable nexus between the measure and its stated objectives of curbing black money, counterfeit currency and terror financing, and held that the notification could not be struck down on that ground, nor invalidated merely because some citizens suffered hardship or because the decision was taken swiftly. The relationship between such executive economic policy and the Bank's wider statutory mandate is explored in the chapter on the functions and powers of the RBI.

Justice Nagarathna's dissent — the grammar of Section 26(2)

Justice B.V. Nagarathna, dissenting in a separate 124-page opinion, would have held the demonetisation of all series of the 500 and 1,000 rupee notes by executive notification to be unlawful — though, given that the matter was being decided years after the event, she granted no substantive relief. Her reasoning proceeded from the plain grammatical meaning of the statute. The word “any” in Section 26(2), she held, means a particular series, not all series; demonetisation of all currency notes of a denomination is a measure of far greater magnitude than the provision contemplates.

Crucially, she drew a distinction between the two routes to demonetisation. Where the proposal originates with the Reserve Bank — the institution the statute entrusts with the recommendation — Section 26(2) may be the proper vehicle. But where, as in 2016, the initiative came from the Central Government and the Bank merely furnished its opinion within twenty-four hours, the action was not a “recommendation” of the Central Board in the sense the statute intends. A demonetisation of that scale, initiated by the Government, ought to have been carried out through a Parliamentary law or an Ordinance — echoing the very route taken in 1978 and validated in Jayantilal. The dissent thus reads Section 26(2) as a narrow, Bank-led power and treats the legislative route as the constitutionally appropriate path for sweeping currency withdrawals. The clash between Gavai J's purposive reading and Nagarathna J's textual one is a model illustration, for judiciary aspirants, of competing canons of statutory interpretation applied to the same words.

Sections 27–31 — safeguarding the integrity of the currency

Several short provisions protect the physical and legal integrity of the currency. Section 27 obliges the Bank “not to reissue bank notes which are torn, defaced or excessively soiled,” ensuring that worn notes are withdrawn rather than recirculated. Section 28 empowers the Bank to frame rules for the refund of value on lost, stolen, mutilated or imperfect notes, but expressly provides that no person is entitled as of right to such a refund — the Bank acts “in its discretion,” a discretion to be exercised under the Reserve Bank of India (Note Refund) Rules. Section 28A authorises the Bank to issue special bank notes and special one-rupee coins in certain circumstances.

Section 31 is the prohibition that gives the issue monopoly its teeth: no person in India other than the Bank or, as authorised, the Central Government may draw, accept, make or issue any bill of exchange, hundi, promissory note or engagement for the payment of money payable to bearer on demand. In substance this prevents private parties from creating instruments that would circulate as money and thereby usurp the Bank's role. Section 32 makes contravention of Section 31 an offence punishable with fine. Together these provisions ensure that the legal-tender quality conferred by Section 26 is not diluted by privately issued bearer instruments competing with the Reserve Bank's notes. The careful exception in Section 31 for cheques and drafts — which are payable to order, not to bearer on demand — illustrates the policy: instruments that move money between named parties are permitted, but only the Bank may create paper that itself circulates hand to hand as a substitute for currency. This is why a banker's cheque or demand draft, though widely used, never acquires the status of legal tender; it is an order to pay, not money.

Sections 33–34 — the assets backing the currency and the Minimum Reserve System

Section 33 prescribes what the Issue Department must hold against the notes it issues. The assets “shall consist of gold coin, gold bullion, foreign securities, rupee coin and rupee securities to such aggregate amount as is not less than the total of the liabilities of the Issue Department.” Originally the Act required a proportional reserve, but Section 33(2) as amended in 1956 substituted the Minimum Reserve System: the aggregate value of gold coin, gold bullion and foreign securities held as assets shall not be less than two hundred crore rupees, of which the value of gold coin and gold bullion alone shall not be less than one hundred and fifteen crore rupees.

The shift from a proportional to a minimum reserve was deliberate monetary policy. Under a proportional system, the volume of notes the Bank could issue was tied rigidly to its gold and foreign-exchange holdings, making the currency inelastic. The Minimum Reserve System freed the Bank to issue notes as the genuine needs of an expanding economy demanded, subject only to a fixed floor of reserves, thereby creating an elastic currency — the precise object recited in the long title of the Act. Section 34 defines the liabilities of the Issue Department as the total of bank notes in circulation, so that Section 33 and Section 34 together complete the balance: notes outstanding on one side, prescribed assets on the other. This asset-backing framework is studied in greater depth alongside the mechanics of note printing in the chapter on the issue of bank notes.

Sections 37–39 — suspension, coin obligations and the supply of currency

The currency chapter closes with provisions for extraordinary circumstances and for the everyday supply of money. Section 37 permits the Central Government, on the Bank's application and for limited periods, to suspend the requirements of Section 33 as to the minimum holding of gold and foreign securities — a safety valve for emergencies when reserves are strained. Such suspension carries conditions, including an increased bank rate, reflecting the gravity of relaxing the statutory backing of the currency.

Section 38 obliges the Central Government to undertake — except in the case of one-rupee notes and coins and subsidiary coins — not to put into circulation any rupees save through the Bank, and to procure all coins for circulation through the Bank, reinforcing the Bank's central position in the supply chain of currency. Section 39 requires the Bank to supply differing denominations of bank notes and coins to the public on demand, in exchange for other notes and coins, so far as it is practicable to do so — the statutory basis of the everyday expectation that one may exchange a large note for smaller ones at a bank counter. Read together with the monopoly in Section 22 and the legal-tender clause in Section 26, these provisions complete a closed circuit: the Bank alone issues, the Government guarantees, the assets back, and the public is assured of supply and exchange.

Exam synthesis — how the provisions and cases fit together

For the judiciary or CLAT-PG candidate, the currency provisions reward a layered understanding. Begin with the monopoly (Section 22) and the legal-tender guarantee (Section 26(1)), because they establish what a bank note legally is — unlimited legal tender representing a public debt guaranteed by the State. That characterisation is the hinge on which both demonetisation cases turn: because a note is a public debt, withdrawing it deprives the holder of property, and deprivation of property must be “by authority of law” (Jayantilal Ratanchand Shah).

Then layer the demonetisation power (Section 26(2)) and the split in Vivek Narayan Sharma: the majority's purposive reading that “any series” covers all series and that the statutory power itself satisfies the “by law” requirement, against Nagarathna J's textual reading that “any” means a particular series and that a Government-initiated, nationwide demonetisation needed Parliamentary legislation. Finally, anchor the policy provisions — the Issue Department's separation (Section 23), the Minimum Reserve System (Section 33), and the supply and exchange obligations (Sections 38–39) — as the machinery that keeps the currency both elastic and trustworthy. A strong answer never recites sections in a vacuum; it shows how Section 26's characterisation of a note as State-guaranteed debt drives the constitutional reasoning, and how the 1956 shift to a minimum reserve fulfils the Act's stated object of monetary stability. For the institutional background to these powers, revisit the introduction to the RBI and Banking Regulation framework.

Frequently asked questions

Under which section does the RBI have the sole right to issue bank notes?

Section 22(1) of the RBI Act, 1934 confers on the Bank the “sole right to issue bank notes in India.” After the appointed day the Central Government cannot issue currency notes except through the Bank, although one-rupee notes, coins and subsidiary coins remain with the Government under the Coinage Act, 2011 and are merely distributed by the Bank as the Government's agent.

What makes a bank note legal tender, and is it legal tender for unlimited amounts?

Section 26(1) makes every bank note legal tender at any place in India for the amount expressed on it, guaranteed by the Central Government, with no upper limit — a creditor cannot refuse notes in payment of a rupee debt. Coins, by contrast, are legal tender only up to the ceilings in Section 6 of the Coinage Act, 2011 (for instance, a rupee coin only up to one thousand rupees).

Was the 1978 demonetisation done under Section 26(2) of the RBI Act?

No. The 1978 demonetisation of 1,000, 5,000 and 10,000 rupee notes was carried out by a separate statute, the High Denomination Bank Notes (Demonetisation) Act, 1978, upheld in Jayantilal Ratanchand Shah v. RBI, AIR 1997 SC 370. The Court there held that a bank note is a public debt, so demonetising it deprives the holder of property and must be done “by authority of law” — satisfied by the 1978 Act.

What did the Supreme Court hold in Vivek Narayan Sharma v. Union of India about the 2016 demonetisation?

In Vivek Narayan Sharma v. Union of India, (2023) 3 SCC 1, a five-judge Constitution Bench by 4:1 upheld the 8 November 2016 notification issued under Section 26(2). The majority (Gavai J) read “any series” purposively to cover all series, held the statutory power itself satisfied the “by law” requirement, rejected excessive delegation because the Central Board's recommendation was a safeguard, and found the measure proportionate.

What was Justice Nagarathna's dissent in the 2016 demonetisation case?

Justice B.V. Nagarathna dissented, reading “any” in Section 26(2) grammatically to mean a particular series, not all series. She held that a nationwide demonetisation initiated by the Central Government — rather than independently recommended by the Reserve Bank — required a Parliamentary law or Ordinance, as in 1978. She declared the action unlawful but granted no substantive relief given the lapse of time.

What is the Minimum Reserve System under Section 33 of the RBI Act?

Section 33 requires the Issue Department's assets (gold, foreign securities, rupee coin and rupee securities) to be at least equal to its liabilities. Since the 1956 amendment, the Bank must hold gold coin, gold bullion and foreign securities worth at least 200 crore rupees, of which gold alone must be at least 115 crore rupees. This minimum-reserve floor replaced the rigid proportional system, allowing an elastic currency that can expand with the economy's needs.