RBI and Government

What is the leadership framework of RBI?

  • The Reserve Bank’s affairs are governed by a central board of directors.
  • The board is appointed by the Government of India as per the Reserve Bank of India Act.
  • Appointed/nominated for a period of four years
  • There is a Governor and not more than four Deputy Governors
  • There are Non-Official Directors which are nominated by Government. There are ten Directors from various fields and two government Official
  • Four Other Directors – one each from four local boards
Relation between RBI and Government:
  • Governor is appointed by appointments committee of the cabinet.
  • The central bank is the primary arm of the government to ensure good monetary and regulatory policies for the welfare of the people of the country.
  • As such, the central bank cannot be fully independent of the government.
  • There has to be healthy, collaborative and mutually respectful relationship between the government and the central bank governor.
  • The latter has to take into account the priorities of the government and the former has to recognise the dharma of the central bank.
What are areas of debate?
  • Globally tenures are longer : England 8 years, USA 14 years
  • Qualifications :
    • The governor should have sound background of economics, operational experience in public policy and a proven record of performance.
    • The person should have impeccable integrity, reputation and stature befitting the position of the RBI governor.
    • He/she should not hesitate to give his/her professional unbiased advice on monetary and financial matters in the interest of the economy
  • Selection Process:
    • If the incumbent is considered for reappointment, then the process should be completed in advance.
    • And the government should made this decision on the basis of his/her performance.
    • In a situation where the person is to be appointed afresh, the Financial Sector Legislative Reforms Commission suggests an expert panel that should be the same for all regulators
Why longer term for RBI governor is imperative now?
  • The 3 years tenure of RBI Governor is lesser than almost all his counterpart in other countries (USA, England etc.) barring Brazil
  • The new Monetary Policy Committee will have a tenure of 4 years and the inflation target will be decided by the Finance Ministry every 5 years
  • In such a scenario the 3 years term of RBI Governor does not fit in as he is an important part of MPC and also has to take steps to contain inflation
  • Since India is moving to a new rules-based monetary policy framework, a longer and more certain tenure is necessary
  • Apart from monetary policy, RBI also looks after banking supervision, currency market, and has an interest in maintaining overall financial stability in the economy. Hence, a longer tenure will allow the governor to plan better



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