Day 26 – Q 4.How important is the post of RBI Governor? Is it necessary that the RBI Governor’s decisions resonate with the priorities of the government? Examine.
4. How important is the post of RBI Governor? Is it necessary that the RBI Governor’s decisions resonate with the priorities of the government? Examine.
आरबीआई गवर्नर का पद कितना महत्वपूर्ण है? क्या यह आवश्यक है कि आरबीआई गवर्नर के फैसले सरकार की प्राथमिकताओं के साथ प्रतिध्वनित हों? जांच करें।
RBI is an independent Statutory Body incorporated under the Reserve Bank of India Act, 1934 with a Separate Board of Directors comprising Full Time Governor, Full Time Deputy Governors (4) and Directors appointed under different fields/ specialisations and the Secretary from Ministry of Finance (Ex- Officio).
Appointment of RBI Governor:
- The Prime Minister’s Office chooses the governor after consulting the finance ministry and the outgoing governor.
- No stipulations in Indian law regarding the qualification of governors, or even for those who will be nominated by the government for India’s first monetary policy committee.
Role of RBI:
- Banker to Government.
- Right to Issue Bank note.
- Formulates Banking policy.
- Licensing Authority.
- Regulation and Management of Foreign Exchange.
- Monetary policy.
- Inflation control.
RBI Governor’s decisions should resonate with the priorities of the government:
- Owned by Government of India: The Reserve Bank of India is India’s central bank and is wholly owned by the Government of India.
- Section 7 of RBI Act: (1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest. (2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
- Legislature role: The legislature interacts with central banks via a variety of mechanisms, such as frequent meetings and consultations.
- Stereotyping: Parliament has decided that since accountability rests with an elected government and not the expert official, so should powers.
Example: Monetary Policy Committee, all decisions beyond it fall within the realm of ‘accountability’, where the elected government has been enabled, again by law, to intervene when required. This is how it should be in any democracy.
RBI Governor’s decisions should not resonate with the priorities of the government:
- Stable policy: The objectives of monetary policy include ensuring inflation targeting and price stability, full employment and stable economic growth. These decisions should not be biased according to vested interests.
- Autonomy: The autonomy of the RBI is a grey area: though it does not legally enjoy the status of an autonomous institution, it largely functions as one.
- Banker’s bank: RBI acts as a banker for both the central as well as state governments. It sells and purchase government securities on their behalf. It also manages liquidity in the system. RBI role prevails.
- Concerned about banking system: RBI wants more power over regulating Public Sector Banks (PSBs). Government wants flexibility.
Examples: NPA rules, dividends, prompt corrective action framework, bad loans.
- Conflict: The RBI-Ministry of Finance conflict—highly public and fiercely political—saw officials from both institutions engage in a battle of turfs through official speeches, press releases, and social media statements.
The tussle between RBI and Government may impact the image of India as stable market; therefore, it is necessary that government should respect the mandate of RBI as Central Bank. At the same time, it must also be understood that RBI has adequate autonomy within the mandate of the RBI Act. Therefore, both parties must talk behind closed doors resolve their differences amicably as they have done so many times in the past.