RBI's Central Board of Directors

What is the issue?

RBI Governor Urjit Patel has convened a meeting of the RBI's Central Board of Directors to discuss on various issues.
With the ongoing tussle between the RBI and the government, it is imperative to understand the roles and functions of the Board.

What is the general mandate of the Board?

The government appoints the Board in accordance with the RBI Act of 1934.
The full strength of the Board is 21, including the Governor and a maximum of four deputy governors.
The Board is required to meet at least six times a year and at least once every quarter.
It generally meets in Delhi at least once when the Finance Minister addresses the full Board after presenting the Budget for the coming year.
S/he outlines the government’s economic philosophy behind the policy initiatives proposed.
Besides Delhi and Mumbai, the Board generally meets in various state capitals.
The Governor seeks advice of the Board, but finally it is his decision.

On interest rates, of course, it is the monetary policy committee that takes a call.
The RBI Act specifies that the deputy governors and the government nominees may attend any or all meetings of the Central Board.
But they are not entitled to vote.
In the event of equality of votes, the Act states that the Governor has a second or casting vote.

What is its current composition?

At present, the Central Board has 18 members, including five official directors - Governor and four deputy governors.
Besides, the present Economic Affairs Secretary and Financial Services Secretary are the government nominees.
Also, there are four other directors representing the Local Boards (one for each region) and seven more directors appointed by the government.
These non-official part-time directors were appointed between March 2016 and August 2018. They enjoy a term of four years.
The RBI Act allows for a five-year term for the Governor and the deputy governors, but it can also be less.
E.g. Former RBI Governor Raghuram Rajan was given a three-year term, and did not get an extension.

Who are appointed in the Board and how?

There is no prescribed list for the government to follow in deciding nominations to the Board.
Part-time, non-official directors are chosen by the political executive.
The proposal for appointment to the Central Board is moved by the Department of Financial Services under the Finance Ministry.
This has to be approved by the Appointments Committee of the Cabinet (ACC).
Generally, the government expects the RBI to consider the views of various stakeholders in the country’s socio-economic landscape.
These include the businesses, cooperatives, self-help groups, academicians, economists, etc.
Also, given the wider and apolitical role of the RBI, government generally avoids appointing individuals with strong ideological or political views.
In this, the government is not obliged to seek the Governor’s views or his concurrence on directors it seeks to appoint.

But conventionally, Finance Ministers informally speak with the Governor before taking the proposal to the ACC.

What are the key functions of the Board?

The Committee of the Central Board meets every week and basically reviews the statistics in RBI’s weekly bulletin.
Two key sub-committees that are chaired by the Governor are

The BFS meets every month and includes deputy governors as ex-officio members and four other directors.
It undertakes supervision of banks, financial institutions and NBFCs (Non Banking Financial Company).
The BPSS takes care of paper-based and electronic systems such as NEFT (National Electronic Funds Transfer) and RTGS (Real-time gross settlement).
There are other sub-committees on information technology, building, audit and risk management, and HR management.

Does the Board have an overriding power?

This question is crucial because the government has already invoked Section 7 of the RBI Act.
It has sought consultation with the Governor on certain issues it considers necessary in public interest.
Under the Reserve Bank of India Act, in Section 7, there are two sub-sections -

the Board has the responsibility to superintend and generally look after the affairs of the bank
subject to regulations which the Board may provide, the Governor or in his absence any deputy governor which he nominates has the same powers

In effect, therefore, both have the powers to superintend and look after the affairs of the bank.
So the Board can give some directions to the Governor, only subject to the regulations which it makes in accordance with the Act.
Those regulations which are there in Section 58 of the Act have a process.
It says that the Board can make regulations with the prior approval of the government by notification in the official gazette.
After this notification is done, within 30 days or so, it has to be placed before parliament.
Both houses of Parliament have to approve that or can modify that.
Therefore, the Board cannot suo motu direct the Governor to do something but has to go through this whole process.

Source: Indian Express