Relationship between RBI and Government of India

 Reserve Bank of India

[As per the RBI Act, the Central Board is made up of the following members (21): Governor, 

four Deputy Governors, Four Directors (one each from the four regional boards of the RBI), 10 

directors to be nominated by the Centre, and two government officials, also to be nominated by the Centre].

The relationship between the Board and the Governor is not comparable to a corporate set-up where the managing director (the corporate equivalent of the Governor) reports to the board and draws his powers from it. While a managing director is an agent of the board in a company, in the RBI, the Governor is not. He draws his powers from the RBI Act and not from the Central Board. He is appointed by the Prime Minister in consultation with the Finance Minister. The RBI Board has no say whatsoever in his appointment. In a company, the board of directors chooses one of its own to be appointed as the managing director. In the RBI, the Governor secures board membership only after he is appointed to the post. It is, thus, wrong to compare a corporate board to the RBI’s and suggest that the Governor is subservient to it.

In RBI, policy decisions are taken by the Governor with its 4 deputy governors and the (Central) Board is just engaged in providing a broader vision to the RBI. RBI Board has always functioned in an advisory role with the understanding that the Governor would consider its advice while making policy decisions. In other words, there is mutual respect between the Board and the Governor, with both operating in a spirit of accommodation.

Relationship between Centre (GoI) and RBI #Centre (GoI) and RBI both has their task cut out but they work in close coordination. But in case of a fundamental disagreement between the Centre and the Governor (RBI management), where they are unable to arrive at a common ground, then Centre has the upper hand and can use Section 7 of the RBI Act to give written direction to RBI and in

that case RBI decision making will pass on to the RBI (Central) Board and then RBI 

Governor will have no say. Section 7 has never been unleashed in the 85 -year existence of 

RBI. It is not as if there have not been any disagreements between RBI Governors and 

governments before this but, things did not reach the brink and were sorted out quietly behind the scenes. Centre also understands that using Sections 7 will necessarily come with a price and will set a bad precedent.RBI has been kept at arm’s length from the Centre and bestowed with acertain independence. That is because the Centre is the spender and the RBI is the creator of money, and there has to be a natural separation between the two. The Centre arming itself with powers to run the RBI runs afoul of this precept.

But there is also a clear reason why, even while it is conceded that control of the nation’s 

currency should be with an independent authority removed from the sway of elected 

representatives, the RBI Act has the veto option to the Government in the form of Section 7. .  And that’s because it is not the technocrats and economists sitting in Mumbai’s Mint Street who carry the can for the policies they frame; it is the rulers in Delhi who do. Ultimately, it is the elected representative ruling the country who is answerable to the citizen every five years. The representative cannot split hairs before the voter while explaining the economy’s performance — he has to own up for everything, including the RBI’s actions, as his own.In a democracy, it is unthinkable that we will have an institution that is so autonomous that it is not answerable to the people. The risk of such an institution is that it will impose its preferences on society against the latter’s will, which is undemocratic.Seen from this perspective, the limits to the RBI’s autonomy will be clear. It is autonomous and accountable to the people ultimately, through the government. The onus is thus on responsible behaviour by both sides. There is enough creative tension between the two built into the system. The Governor has to be conscious of the limits to his autonomy at all times, and the government has to consider the advice coming from Mint Streetin all seriousness.