Chapter III — Central Banking Functions

Section 40: Transactions in foreign exchange

Reviewed by CA Nikhil Gupta · Last reviewed 18 September 2026

Section 40 governs RBI's obligation/authority in foreign-exchange transactions at its offices or agencies on terms and rates determined under the statutory framework.

Operative provisionOfficial sources mappedProvision-specific decode

Finin2min - Section 40 in 2 minutes

Legal effectSection 40 governs RBI's obligation/authority in foreign-exchange transactions at its offices or agencies on terms and rates determined under the statutory framework.

Operative ruleHistorically it supports official purchase/sale of foreign exchange, but modern foreign-exchange regulation also depends heavily on FEMA and RBI directions issued under that separate statute.

Connected lawDo not use Section 40 as a complete code for customer FX transactions; identify the FEMA route and authorised-dealer rules as well.

File evidenceFor an RBI-level FX transaction, retain rate/terms, eligible counterparty and the legal framework in force on the date.

Statutory structure and clause / subsection decode

This map separates the operative limbs of this provision so thresholds, powers, conditions and exceptions are not collapsed into a single summary.

Scope

Section 40 governs RBI's obligation/authority in foreign-exchange transactions at its offices or agencies on terms and rates determined under the statutory framework.

Operative limb

Historically it supports official purchase/sale of foreign exchange, but modern foreign-exchange regulation also depends heavily on FEMA and RBI directions issued under that separate statute.

Legal boundary

Do not use Section 40 as a complete code for customer FX transactions; identify the FEMA route and authorised-dealer rules as well.

Worked practical example

Facts. A corporate remittance dispute is ordinarily not solved by Section 40 alone; the adviser must move to FEMA and applicable RBI directions for the customer transaction.

Compliance points and common mistakes

Do not decide the issue from the heading alone. Map the facts to the operative words of Section 40 and to each relevant subsection, clause, proviso or explanation shown above.
Keep the statutory question separate from the operational overlay. Do not use Section 40 as a complete code for customer FX transactions; identify the FEMA route and authorised-dealer rules as well.
Do not convert an exception, exemption or discretionary RBI/Government power into an automatic entitlement. Record the authority, conditions and effective date.
Where the provision is historical, omitted or repealed, state that status prominently and do not present it as a current compliance obligation.

Connected provisions and instruments

Section 40 has no universal instrument dependency in this package. Add an RBI circular or direction only when its subject, entity and effective date cover the issue being analysed.

Questions and answers

What is the purpose of Section 40?

Transactions in foreign exchange: Section 40 governs RBI's obligation/authority in foreign-exchange transactions at its offices or agencies on terms and rates determined under the statutory framework.

Which statutory limb should be checked first?

Scope - Section 40 governs RBI's obligation/authority in foreign-exchange transactions at its offices or agencies on terms and rates determined under the statutory framework.

What is the next legal boundary?

Operative limb - Historically it supports official purchase/sale of foreign exchange, but modern foreign-exchange regulation also depends heavily on FEMA and RBI directions issued under that separate statute.

What record should support the conclusion?

Section 40 file evidence: For an RBI-level FX transaction, retain rate/terms, eligible counterparty and the legal framework in force on the date.

Primary sources

Source control for Section 40: use the official consolidated RBI Act for the statutory text and footnotes, then separately reconcile any post-Finance Act 2022 amendment, commencement notification or RBI instrument relevant to the event date.