India: The Executive, The Central Bank And The Fault In Their Stars

Last Updated: 11 December 2018
Article by Shruti Rajan and Garima Joshi

At the heart of any modern democracy lies the doctrine of separation of powers, which ensures division of responsibilities and also structurally validates a key principle of governance, i.e., allowing each institution to function autonomously, while still maintaining accountability within the larger legislative framework. In codifying its own unique (and somewhat limited) interpretation of this doctrine, the Constitution of India delineates functions of the Union and the states, allowing Parliament to legislate on the functions of key agencies such as the Central Bureau of Investigation and the Reserve Bank of India (Entry 38, Seventh Schedule).

In the past few years, the Reserve Bank of India (RBI) has had its work cut out, with rising non-performing assets and inflationary pressures prompting tough talk and action at its end. As a central bank, the RBI's approach and policies have been driven by its own long term macro-economic imperatives but Central Government, in contrast, has a multitude of other concerns (typically short term) that compel it to approach policy decisions differently. Naturally, this has led to discord between the RBI and the current Central Government, as laid bare in the aftermath of the meeting of the RBI Board on October 23, 2018. Following the meeting came reports of the Government possibly invoking Section 7 of the RBI Act, 1934 (RBI Act), which gives it the power to issue directions to the RBI.

Since then, the stand-off between the Government and the RBI has been riding high on news cycles over the past few weeks and, given upcoming elections, has been getting the kind of mainstream media attention usually reserved for celebrity weddings. The politicisation of this fracas was inevitable, as was the influx of literature (ranging from economic analysis to polarised opinion pieces) that is now available in the public domain on this.

This piece, though, focusses on the legal underpinnings of this saga and, in doing so, discusses the legal framework that governs the interaction between today's Central Bank and Government, including a comparison with other jurisdictions. It then concludes with an analysis of whether the proposals of the Financial Sector Legislative Reforms Commission (FSLRC) could have helped create an institutional safety valve (at best) or at least a viable resolution mechanism for such stalemates.

Applicable Legal Framework in India

Section 7 of the RBI Act empowers Central Government to give such directions to the RBI as it may, after consultation with the RBI Governor, consider necessary in the public interest. At the outset, the directions are required to be preceded by consultations with the Governor and have to pass the test of being necessary in the public interest. This in itself, may not be challenging. "Public interest" is a wide term and does not have any specific meaning ascribed to it in the RBI Act either. Further, it is an accepted principle of administrative and constitutional law that the executive does not have carte blanche when it is required to satisfy itself of necessity before proceeding with certain actions; rather it should review actions, judicial or otherwise, with great restraint and circumspection. The requirement of consultation with the Governor is in keeping with the larger concept of checks and balances; however, the ultimate authority seems to vest with Central Government itself. It is also hard to imagine a situation in which a direction will be issued, if the Governor and Central Government were in agreement to begin with.

Also relevant to note is the fact that the general superintendence and direction of the affairs and business of the RBI have been entrusted to a Board, in whose appointment Central Government plays an important role. The Board itself comprises of a Governor and not more than four Deputy Governors (to be appointed by Central Government); four representatives of local RBI boards, ten Directors and two Government officials, all to be nominated by Central Government.

Section 30 of the RBI Act also sets out the manner in which Central Government may supersede the Board, which requires a full report of the circumstances and the action taken to be laid before Parliament at the earliest possible opportunity and in any case within three months from the notification to this effect.

Similar provisions exist for other regulators as well. The Securities and Exchange Board of India (SEBI) is a good example, where the Securities and Exchange Board of India Act, 1992, contains provisions under which SEBI is bound by the directions of Central Government on questions of policy. While Central Government has the powers to make appointments to the SEBI Board, it is also empowered to supersede SEBI for a period of six months. Similar powers exist under the Insurance Regulatory and Development Authority of India Act, 1999, as well.

Therefore, the legislative superstructure allows for all financial sector regulators to remain independent but when inclined, there is sufficient statutory basis for Central Government to intervene.

Global Trends

Scrimmages between governments and central banks are far from unique to India. The US Federal Reserve has also been facing flak from the Government recently (admittedly a rare occurrence), which has raised debates on its institutional independence. In fact, a significant amount of research and empirical studies have analysed central bank independence and its correlation with other macro indicators. Some studies have also delved into the nuanced aspects of interactions between governments and central banks.

For instance, in a paper titled, "The relationship between the central bank and the government" by Paul Moser-Boehm at a special meeting of governors held at the Bank for International Settlements (BIS), Basel, 14-15 March 2006, an analysis was undertaken of the nature of meetings and contact between the central bank and their governments, including frequency and purpose of formal meetings, as well as informal contact. The paper observed that the purposes of meetings involving the Governor tend to be more wide-ranging, with greater informal contact in emerging market economies than in industrialised countries. It concluded that this probably reflects the often broader range of mandates of central banks in emerging rather than industrialised economies.

On an examination of the framework in place in the US, UK, Euro Area, Japan and Canada, it is clear that the central banks in these jurisdictions have been set up in a manner that enables them to function independently, albeit attendant safeguards may vary. In the US, UK, Japan and Canada, central bank independence is enshrined in laws, much like India, and any significant departure to the manner of functioning can only be made by amending such laws.

However, as a function of the Euro Area framework itself, the European Central Bank's (ECB) independence is set out in an international treaty, changes to which would require ratification from the member states, providing a greater assurance of autonomy. The treaty not only prohibits the ECB from seeking or taking instruction from any institution, government or other body but also prohibits governments and other institutions from influencing the decision-making bodies of the ECB.

In the UK specifically, the parliament has the power to override decisions of the central bank, i.e. the Bank of England, in extreme circumstances. In Canada as well, there is a possibility of a written directive concerning monetary policy being issued, which the central bank would have to comply with.

Some experts consider the existence of such directive clauses an important instrument of democratic accountability, provided it is not unconditional and subject to review. Keeping these objectives of accountability and transparency in mind, and given the impact the central bank policies have on an economy, there is indeed reason to accept directive clauses, provided there are sufficient safeguards to ensure continued independence of the central bank.

Where is the Safety Valve?

The FSLRC, as a part of its wide ranging mandate, had identified the Financial Sector Development Council (FSDC) as the central intercessor across all regulators in its 2013 report. However, even the FSDC was proposed to be chaired by the Finance Minister with heads of regulatory agencies as its other members, thereby allowing the Government to have significant influence on a number of issues, including systemic risk regulation and crisis management/resolution.

Subsequent to the recommendations of the FSLRC, the Monetary Policy Committee was created in 2016 with the view that a committee-based approach for determining the monetary policy will add a lot of value and transparency to decision-making. Most importantly, the RBI Act itself requires Central Government to appoint as members, persons of ability, integrity and standing, having knowledge and experience in the field of economics or banking or finance or monetary policy. It is interesting to note that the FSLRC had also included the requirement of ensuring that Central Government appointees have expertise in dealing with matters relating to banking, payments and monetary policy. The independence of any central bank is admittedly conducive to price-stability and long term growth and perhaps now is the time to also take a relook at the composition of the Board to ensure that the RBI remains a technocracy.

Central Government and the RBI seem to have agreed on a temporary truce, but it will be interesting to watch this through to its end, given the upcoming elections.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions