Relevance: GS Paper III (Indian Economy)
[1300 words reduced to 300]
- There has been an attempt by the Centre to override the RBI Governor through RBI Board.
- Questions that arise from this tussle:
- Where does the balance of power lie between the Governor and the RBI board?
- What is the legal position of the board in relation to the Governor?
- Can the board give directions to the Governor on issues of policy and management of the central bank?
- The relationship between the board and the Governor is not comparable to a managing director in a corporate. It is, thus, wrong to compare a corporate board to the RBI’s and suggest that the Governor is subservient to it.
- As per the RBI Act, the RBI board is made up of the following members:
- the Governor and four Deputy Governors,
- four directors (one each from the four regional boards of the RBI),
- 10 directors to be nominated by the Centre, and
- one government official who is also to be nominated by the Center.
- Balance of power between the Governor and the board
- The board, under Section 58 of the RBI Act , can make regulations that will give it the powers to override those of the Governor’s.
- Section 7(1) which confers powers on the Centre to issue directions to the RBI in the public interest after consultations with the Governor.
- According to convention, the RBI Board has always functioned in an advisory role. The spirit of accommodation between the RBI and the Center, which was evident earlier, is absent now.
- If the government overrides the Governor, such a move will not only set a bad precedent but also lead to several ticklish situations such as
- Conflict of interest in case of the industrialists member of the Board.
- Degradation of natural separation between the govt who is a spender and the RBI who is the creator of money.
- It is time for the Center and the RBI to act with mutual respect and a spirit of accommodation.
