Relevance: GS Paper III (Indian Economy)
Theme of the article
The RBI, the RBI board and the government must understand the limits to which they can push each other.
Why has this issue cropped up?
Recently, there has been a spat between the Reserve Bank of India (RBI) and the government.
Section 7 of RBI act
- Section 7 of the RBI Act sets out the relationship between the government and the RBI.
- This section gives the government the right to issue directions to the RBI in public interest.
- In context of the current spat, it would have been unwise for government to use Section 7 to issue instructions.
Recent step to give autonomy to RBI
The recent change in the monetary policy framework setting up the Monetary Policy Committee and giving it full freedom to determine the policy rate is a giant step forward in terms of giving the RBI autonomy.
Different aspects of autonomy
- There is a distinction between autonomy as a monetary authority and autonomy as a regulator.
- In the first case, autonomy has to be full once the mandate is given. In the second case, autonomy is somewhat blurred because the mandate is broad and vague.
RBI and board
- There has been a debate about the relationship between the RBI management headed by the Governor and the board.
- The right way of interpretation is that both the board and the Governor have concurrent powers in almost all matters.
- The board has members nominated by the Central government from various walks of life, including industry. This can result in a conflict of interest. Therefore, the tradition that had evolved is that the board has largely functioned as an adviser.
- Section 7 is a mix of things. First, it gives powers to the board, and second, it gives powers to the Governor as well. The way the relationship between the board and the Governor has evolved over time in India is a good one. The board by and large has played an advisory role.
- Section 7 hangs like a sword. It is important to have continuous and sustained dialogue, and an atmosphere of give and take is much needed.
- While the Governor can act on his own, he must listen to what the members feel and the sense of the board must be fully reflected in his actions.
The RBI, the board and the government must understand the limits to which they can push. A spirit of accommodation must prevail.