Relevance: GS Paper III (Indian Economy)
Why has this issue cropped up?
Recently, the RBI issued a note after the meeting of its board of directors which hints towards degradation of RBI’s autonomy.
Infringement of RBI’s autonomy
- The note mentions that the constitution of a committee to examine the economic capital framework of the RBI will be jointly determined by the RBI and the Government of India.
- Such announcements constitute a significant departure from what has appeared to be the position of the RBI thus far: policy decisions, especially those relating to regulation, are the exclusive province of RBI management. Any departure from this position amounts to an infringement of the RBI’s autonomy.
- The government and some of the current nominee directors on the RBI board have contended that all policy decisions must be deliberated by the board. The outcomes of the meeting suggest that the RBI has conceded this vital principle. It may well constitute a paradigm shift in the functioning of the RBI.
A grey area
- The precise relationship between the RBI board and the RBI management is something of a grey area.
- Various experts have made the point that the RBI Act vests all powers in the board and, concurrently, it vests those very powers in the RBI Governor.
- Whether the board can issue directions to the RBI Governor in the event of a difference of opinion between the two is not clear.
- Many contend that the RBI board has played an advisory role in the past and should continue to do so.
Reasons for Govt-RBI conflict
- The government’s position is that the RBI’s reserves are in excess of reserves typically held by central banks elsewhere which must be transferred to the govt. Some have described the government’s position as an attempt to ‘raid the reserves’ of the RBI to fund its fiscal deficit.
- The RBI’s requirement of capital adequacy is one percentage point higher than that of the internationally accepted Basel norms. The government wants to align Indian banks’ requirements with the Basel norms as that would reduce the demands for capital made on it by public sector banks (PSBs).
- The government suggested for easing the norms for Prompt Corrective Action (PCA) for banks. A relaxation in PCA norms, by translating into higher credit flows, could relieve stress in the broader economy.
- The statute has conferred powers on the RBI board but these powers should be exercised rarely. The RBI board must play a largely advisory role.
- The RBI management may or may not accept the inputs of the board. But the board must have its say. This is elementary corporate governance.
- As a public institution whose actions have enormous welfare implications, the RBI’ s actions must flow from a consultative process. It must explain and justify its actions.
RBI must be seen to be accountable. The RBI board could be an important mechanism for ensuring that these conditions are met.