Balance of power, in the balance (RBI versus Government)

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Balance of power, in the balance (RBI versus Government)

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• Role of Board of Directors: The RBI's Board is in focus now, given the tussle with the government on fundamental issues. Can the Board override the Governor?
• Basic questions: The govt. is trying to use Section 7 of the RBI Act, 1934. Questions raised are -

1. Who is more powerful - the Board or the Governor?
2. Legally, what is the Board's position vis-a-vis the Governor?
3. Can the Board give instructions to the Governor in policy and management matters?

• Not like a corporate: It is clear that RBI Board and Governor relationship is unlike that in a corporate setup.

1. A corporate MD is an agent of the Board in corporates, but not so in the RBI, as his powers flow from the RBI Act, 1934.
2. His appointment is by the PM and FM, not by the Board.
3. Governor becomes a member of the Board after the appointment, unlike a corporate.

• Structure of the RBI Board: It has a Governor and 4 Deputy Governors, four Directors (one each from four regional boards), 10 directors to be nominated by centre, and 1 govt.official by Centre. The sections in RBI Act dealing with powers is vaguely worded. Governor draws his powers from Section 7(3), and can exercise all that can be done by the RBI.

• Section 58: The Board can override the Governor's powers by making new regulations, provided

1. the regulations must be consistent with the provisions of the RBI Act, and
2. they have to go through a long approval process (Section 58(4)). The Parliament has to approve!

• Section 7(1), the brahmastra: Centre can issue directions to RBI in public interest, and if this is invoked, the Governor may choose to leave.
• Till date: A healthy respect between the Board and Governor existed, and accommodation was the name of the game. In 83 years, none of the Sections - 7(1) or 7(3) - have been invoked.
• Earlier conflicts: YV Reddy and D Subbarao mentioned many conflicts, all amicably resolved. Never was Section 7 discussed.
• Then and now: The spirit of accommodation seems to have vanished. Now, if Section 7 is invoked, then people will see a conflict of interest, as many industry representatives are present on the Board (Tata Sons Chairman, Sun Pharma MD, Teamlease founder, etc.). And the policy of RBI being kept at arm's length from the Government will be harmed.
• Spender versus Creator: The Central government spends money, and RBI creates money. They must be separate from each other, otherwise disaster looms.
• Don't do it: The Centre must not push the RBI into uncharted territory, or the consequences will be dangerous.
• Summary - There has to be an arm's length relationship between the Centre and the RBI, else both risk entering an uncharted territory.

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