The RBI concedes a vital principle

Its openness to the board discussing all policy decisions may well be a paradigm shift The angel was in the detail of the terse press note that the Reserve Bank of India (RBI) issued after the meeting of its board of directors on November 19. Every one of the four decisions taken, including three decisions related to regulation, was ascribed to the board. The note also mentions that the constitution of a committee to examine the economic capital framework of the RBI, which was one of the decisions taken, will be jointly determined by the RBI and the Government of India. These announcements constitute a significant departure from what has appeared to be the position of the RBI thus far: policy decisions, especially those relating to regulation, are the exclusive province of RBI management. Any departure from this position amounts to an infringement of the RBI’s autonomy. The government and some of the current nominee directors on the RBI board have contended that all policy decisions must be deliberated by the board. The outcomes of the November 19 meeting suggest that the RBI has conceded this vital principle. This augurs well for the relationship between the government and the RBI management hereafter. Indeed, it may well constitute a paradigm shift in the functioning of the RBI. A grey area The precise relationship between the RBI board and the RBI management is something of a grey area. Various experts have made the point that the RBI Act vests all powers in the board and, concurrently, it vests those very powers in the RBI Governor. Whether the board can issue directions to the RBI Governor in the event of a difference of opinion between the two is not clear; some experts reject the suggestion outright. Many contend that the RBI board has played an advisory role in the past and should continue to do so. Well, corporate boards too play an advisory role for the most part even though they enjoy full powers in the running of the corporation. They tend to leave most decisions to management. However, corporate boards do step in and play a more active role where management is found wanting.

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