UPSC Prelims 2021 Q1: RBI Governor & Centre's Power to Direct RBI
Consider the following statements:
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?
- 1 and 2 only
- 2 and 3 only
- 1 and 3 only
- 1, 2 and 3
Answer: (c) 1 and 3 only
Statement-wise explanation
- 1: correct — Section 8(1)(a) of the Reserve Bank of India Act, 1934 says the Central Government appoints the Governor and up to four Deputy Governors. Section 8(4) sets the Governor's term at no more than five years, with eligibility for reappointment. In practice the Appointments Committee of the Cabinet approves the name. For example, it approved Y. Venugopal Reddy in 2003 for a five-year term.
- 2: incorrect — The Centre does have the power to direct the RBI in the public interest, but that power comes from a statute, not the Constitution. Section 7(1) of the RBI Act, 1934 lets the Central Government give directions to the Bank 'after consultation with the Governor' when it considers them necessary in the public interest. The RBI was created by this 1934 Act of the pre-independence legislature. The Constitution does not establish the RBI or give the Centre any power over it.
- 3: correct — Section 7(3) of the RBI Act gives the Governor powers of general superintendence and direction of the Bank's affairs and business. If the Governor is absent, a Deputy Governor nominated by the Governor holds these powers. They are exercised subject to regulations made by the Central Board, and the Governor may also exercise all powers the Bank itself can exercise. The Governor's authority therefore comes from the RBI Act.
How to eliminate
Start with Statement 2. Ask what the Constitution actually says about the RBI. The RBI is a statutory body set up by the RBI Act, 1934, and that Act came before the Constitution of 1950. The Constitution has no article creating the RBI or regulating how the government deals with it. The phrase 'provisions in the Constitution' should therefore make you suspicious. UPSC often takes a true power and pins it on the wrong source (Constitution instead of Act, or Act instead of rules). Once Statement 2 goes, only the option with 1 and 3 is left. Statements 1 and 3 are also safe on their own logic. A statutory body's head is appointed under its parent Act, and the head's powers come from that same Act. Fact to remember: the RBI is statutory, the Governor is appointed under Section 8, and the Centre's power to direct the RBI is in Section 7.
Know more
The RBI is a statutory body, not a constitutional one. The Reserve Bank of India Act, 1934 created it. The RBI started work on 1 April 1935 and was nationalised in 1949. Every power over the RBI, held by the Centre, the Board or the Governor, comes from this Act.
| Provision (RBI Act, 1934) | What it does |
|---|---|
| Section 7(1) | Centre may give directions to the RBI in the public interest, after consulting the Governor |
| Section 7(2) | General superintendence of the Bank's affairs is with the Central Board, subject to such directions |
| Section 7(3) | Governor (or a nominated Deputy Governor) holds powers of general superintendence and direction, subject to Board regulations |
| Section 8(1)(a) | Centre appoints the Governor and up to 4 Deputy Governors |
| Section 8(4) | Governor's term is up to 5 years, with reappointment allowed |
| Section 45ZB | Six-member Monetary Policy Committee, chaired by the Governor |
Central Board of Directors. All members are appointed or nominated by the Government of India:
- Official directors: the Governor and up to four Deputy Governors.
- Non-official directors: ten nominated from various fields, two government officials, and four from the RBI's four local boards.
Section 7 in practice. The RBI says Section 7 gives it operational independence while keeping the Centre's right to issue directions in the public interest. The directions power was long described as never used. Consultations under it in late 2018 became a well-known flashpoint in the debate on central bank independence.
Exam pattern. For any body, separate where it comes from (Constitution, Act, or executive resolution) from who appoints its head. For example, the CAG and the Finance Commission are constitutional bodies, while the RBI and SEBI are statutory bodies.
NCERT Concepts to Revise
- Central bank independence: Statements 2 and 3 are about how far the government can steer the RBI and where the Governor's authority comes from, which is the core of central bank independence.
- Monetary Policy Committee: The MPC is set up under the RBI Act and chaired by the Governor, a useful example of the Governor's statutory role.