Let’s understand the process of appointment of RBI Governor and the associated challenges in ensuring transparency and institutional independence.
Why in News?
The Appointments Committee of the Cabinet on Monday gave its nod for the selection of the 56-year-old Malhotra as the 26th RBI Governor with effect from December 11 for a period of three years.
Shaktikanta Das – Achievements
Led the central bank in the last six years with several key decisions and overhaul of the regulatory framework, inflation remains an unfinished agenda. Despite a 250 basis points hike in the repo rate — the key policy rate, between May 2022 and February 8, 2023, consumer price index-based (CPI) inflation continued to remain elevated and above the RBI’s comfort zone of 2-6 per cent, as mandated by the government.
In his tenure as the RBI Governor for the last 6 years, Das used conventional and unconventional policy measures to maintain macroeconomic and financial stability in the country.
During Covid 19 pandemic, Das reduced the repo rate by 115 basis points to revive the economy. He offered a loan moratorium to mitigate the adverse impact of the pandemic.
The RBI, under Das, continued reforms in the banking sector at a time when lenders were reeling under the worst asset quality situation. The efforts resulted in an improvement in the gross non-performing assets (GNPAs) of banks from 10.8 per cent in September 2018 to 2.8 per cent at end-March 2024.
Appointment of RBI Governor
The Reserve Bank of India (RBI) Governor is appointed in accordance with the RBI Act, 1934, which specifies that the Governor is selected by the Central government.
The Financial Sector Regulatory Appointment Search Committee, comprising the Cabinet Secretary, the current RBI Governor, the Financial Services Secretary, and two independent members, prepares a list of eligible candidates for the position.
The shortlisted candidates are interviewed, and their names are forwarded to the Cabinet Committee on Appointments, chaired by the Prime Minister.
The committee finalizes the selection by confirming the appointment.
The Governor’s tenure is limited to a maximum of five years, with the duration determined by the government at the time of appointment.
The RBI Governor is also eligible for reappointment or an extension of their term.
Consider the following statements: (2021)
(1) The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
(2) Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
(3) The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
a)1 and 2 only
b)2 and 3 only
c)1 and 3 only
d)1, 2 and 3
Consider the following statements: (2021)
(1) The Governor of the Reserve Bank of India (RBI) is appointed by the Central Government.
(2) Certain provisions in the Constitution of India give the Central Government the right to issue directions to the RBI in public interest.
(3) The Governor of the RBI draws his power from the RBI Act.
Which of the above statements are correct?
a)1 and 2 only
b)2 and 3 only
c)1 and 3 only
d)1, 2 and 3
Shaktikanta Das’ tenure at the helm of the Reserve Bank of India (RBI) comes to an end on December 10 amid some degree of friction with North Block towards the end of his second term as Governor.
The trigger was the central bank’s refusal to cut key policy rates despite growing calls on the need to tackle the slowdown in GDP growth. This tussle between the government and the Reserve Bank of India, though, is not something new or unusual.
Turf wars between the two sides have played out for years as successive Governors sought to protect the autonomy and independence of the central bank. The four predecessors of Governor Das — YV Reddy, D Subbarao, Raghuram Rajan and Urjit Patel — had escalating conflicts with the governments in Delhi on issues, including the issue of cutting rates to spur growth.
There was a repeat of this trend, with two union ministers recently calling for a cut in the repo rate ahead of the monetary policy review on December 8. Finance Minister Nirmala Sitharaman batted for “affordable bank interest rates” to support industries to ramp up and build capacities.
Union Minister for Commerce and Industry, Piyush Goyal, also urged the RBI to cut interest rates to boost economic growth and look through food prices while deciding on monetary policy.
However, much against the wishes of the government, the RBI, which is keen to bring inflation under control, kept the Repo rate unchanged at 6.50 per cent.
YV Reddy, who was RBI Governor from 2003 to 2008, had run-ins with then Finance Minister P Chidambaram and had to even offer an “unconditional apology” to the minister after the then Prime Minister Manmohan Singh tried to sort things out between them.
Reddy, who contemplated quitting twice during his tenure, said the government has powers to give directions. But, in giving directions also, unlike other statutes, consultation with the Governor is necessary in regard to the RBI before issuing the directions, according to Reddy.
A major area of disagreement between Reddy and Chidambaram related to the development of financial markets. Chidambaram was keen about the development of bond currency derivatives in an integrated manner.
However, Reddy explained that there were other priorities for the financial sector reform. Reddy opposed the proposal made in February 2008 to write off loans to farmers amounting to Rs 60,000 crore.
A proposal to utilise India’s growing foreign exchange reserves (during 2004-05 to 07-08) was mooted by the Planning Commission first and then by the government. That put the government in conflict with the RBI which was opposed to the proposal saying that it was not unencumbered. It was sorted out only after the RBI insisted that the government provide a guarantee on lending by a government backed entity – IIFCL from part of the reserves.
After Reddy made a mention of Tobin tax on capital flows in a speech citing it as an empirical case, the government forced the Governor to clarify the same day that there was no intention to tax inflows.
With differences between him and the Finance Ministry surfacing on several occasions, D Subbarao wrote that he was “invariably discomfited and annoyed by this demand that the RBI should be a cheerleader for the government”. Subbarao was the RBI Governor during 2008-2013 when the global financial crisis rocked the financial system.
“Both Chidambaram and Pranab Mukherjee who were finance ministers during that period were vexed by the RBI’s anti-inflation stance, which they thought was stymieing growth,” Subbarao wrote in his recent book ‘Just A Mercenary? Notes from My Life and Career’
“I had run-ins with both Chidambaram and Mukherjee on the RBI’s policy stance. Both of them invariably pressed for softer rates although their styles were different,” Subbarao said, noting that Chidambaram typically argued his case like the lawyer that he so eminently is, while Mukherjee was the quintessential politician.
The formation of the Financial Stability and Development Council or FSDC headed by the finance minister was a flash point between the finance ministry and the RBI.
The central bank’s rationale was that the primary responsibility of stability was with the RBI and the new arrangement could undermine its influence. The Government still went ahead with the proposal when Pranab Mukherjee was the finance minister.
The other major tussle which was played out in the open was on interest rates. Chidambaram as finance minister was pitching for lower interest rates at a time when inflation was still relatively high.
When the RBI didn’t oblige, he went on to say that -if the government has to walk alone to face the challenge of growth, we will walk alone.
That prompted Subbarao to respond a week before he completed his term that “I do hope that finance minister, Chidamabaram will one day say that I am so frustrated by the Reserve Bank that I want to go for a walk even if I have to walk alone. But thank God the Reserve Bank exists “.
Raghuram Rajan who was the RBI Governor between 2013 and 2016, recalled the words of his predecessor Subbarao about “frustrated by the Reserve Bank, so frustrated that I want to go for a walk, even if I have to walk alone. But thank God, the Reserve Bank exists.” “I would go a little further. The Reserve Bank cannot just exist, its ability to say “No!” has to be protected,” Rajan said.
In 2015 when the government incorporated a provision in the finance bill without consulting the RBI -to assign the responsibility of regulating the money markets to Sebi, the RBI protested fiercely. Rajan took his objections to the finance minister and the government, leading to the proposal being rolled back.
Rajan was apparently not very enthusiastic about demonetisation of the notes. During his tenure, the RBI sent a note outlining potential costs and benefits of demonetisation, as well as alternatives that could achieve similar aims. “If the government, on weighing the pros and cons, still decided to go ahead with demonetisation, the note outlined the preparation that would be needed, and the time that preparation would take. The RBI flagged what would happen if preparation was inadequate,” he wrote.
Rajan was not given an extension by the government. Weeks after he left the Governor post, the government announced demonetisation of Rs 1000 and Rs 500 notes. Urjit Patel took charge as the 24th Governor on September 5, 2016, and was chosen by the BJP-led government. Under him, relations between the RBI and the government remained fractious. Citing “personal reasons”, Patel quit as the RBI Governor on December 10, 2018.
Under Patel, there were significant differences between the RBI and the government after the central bank resisted the government’s pressure to change policies on surplus transfer, liquidity window for finance companies and more powers for the RBI Central Board. The government had for the first time invoked a provision in the RBI law — Section 7 — to open a formal discussion with the Governor.
During the tenure of Urjit Patel, the feud erupted when the government reportedly sought to tap into the RBI’s excess capital reserves. Then, it also wanted the central bank to relax lending norms to smaller businesses. Patel refused to buckle under pressure from the government on various issues and preferred to resign.
According to Patel, as the government’s headroom for running higher fiscal deficits is exhausted, government banks are encouraged to (over) lend to pump-prime the economy and boost preferred sectors, he said in his book “Overdraft: Saving the Indian Saver”. Almost inevitably, this leads to higher NPAs over time, which requires equity infusion from the government, and this eventually adds to the fiscal deficit and sovereign liabilities, he blamed the government.
On October 26, 2018, the slugfest between the RBI and the government came out in the open when then Deputy Governor Viral Acharya, in a stinging criticism, reminded the government about the need for an independent central bank and warned that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution”.
Mains Practice Questions
- The independence of the RBI is linked to the autonomy of its leadership. Suggest reforms to ensure a balance between governmental oversight and the independence of the central bank in India.
- Discuss the process of appointment of the RBI Governor and the associated challenges in ensuring transparency and institutional independence.