Govt wants closer supervision of RBI; Proposal to be discussed in next board meeting

In order to obtain greater government supervision, Central government has planned to propose new rules that will strengthen the power of RBI's central board.

The next RBI board meeting is scheduled to take place on November 19. (Image: RBI)

New Delhi: In order to obtain greater government supervision, the Bharatiya Janata Party (BJP)-led Central government has planned to propose new rules that will strengthen the power of the Reserve Bank of India’s (RBI) central board. According to a report by news agency Bloomberg, the Finance Ministry has recommended that the board of RBI draft regulation should set up panels to oversee functions including financial stability, monetary-policy transmission and foreign exchange management. Over ages, RBI’s central board has never been given a free hand to make decisions on its own. However, the report stated that people close to the development believe that the move is meant to empower the regulator’s board, which includes government nominees and gives it a supervisory role. However, this move may undermine the confidence of investors in the fastest growing economy of the world. The central board till now does not take any financial decisions and rather advises the regulator or the RBI governor and other officials. The board currently has 18 members, with five people from the central bank including RBI governor and four deputy governors. The next RBI board meeting is scheduled to take place on November 19. “The recommendations being considered include setting up several committees comprising two to three board members each. The body has the powers to frame rules under section 58 of the Reserve Bank of India Act, 1934, and no legislative change is required,” the Bloomberg report stated citing people close to the matter. However, several RBI officials including Swaminathan Gurumurthy, a chartered accountant who was nominated by the Modi administration to the board and government nominees Subhash Chandra Garg and Rajiv Kumar have been vocal about the perceived shortcomings in banking supervision. They have also expressed concerns overflow of credit to industry and easier financial conditions to overcome crisis in its shadow-banking sector. During a TV interview, a leader from Congress who is also the Chairman of parliamentary panel of finance termed the government proposal as an assault of the independence of RBI. Last month, RBI deputy governor Viral Acharya said that a move to undermine RBI’s independence will attract the wrath of the markets. Recently, the finance ministry upped the ante against the central bank by imposing Section 7 of the RBI Act which gives government the power to issue directions that are binding on the central bank.