Management of Reserve Bank of India

Sections 7 and 8 of RBI Act, 1934

Media has been debating the harm likely to be inflicted on the Indian Economy if GOI invokes Section 7 of the RBI Act, 1934 to ‘discipline’ RBI Governor Urjit Patel and his Team RBI. We are told that when RBI Central Board meets on November 19, GOI nominees on RBI’s Central Board will plead Centre’s case for (a) relaxations in Prompt Corrective Action (PCA) norms in respect of PSBs, (b) deciding adequacy of reserves for RBI and (c) relaxation of regulatory norms to increase flow of credit to certain sectors among some twelve issues on which difference in perception exists between finance ministry and RBI. Looks very fair indeed.
Section 7 of the RBI Act reads:
Section 7. Management.- (1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.
The Section just ensures fair and proper management of the Reserve Bank of India. I will not elaborate on the redundancy of the current media debate about ‘invoking Section 7’ beyond saying that any direction under this Section will be issued in consultation with RBI Governor and if the Governor fails to convince the RBI’s policy stance on any issue and GOI opts to discipline the Governor by issuing a ‘direction’, the Governor will not fall sick, but opt to exit through the front door of RBI’s Central Office Building.
Second, about splitting the RBI Central Board vertically with GOI nominees on one side and RBI Governor and his Deputies on the other.
A reading of Section 8 of the RBI Act will convince one that the entire RBI Central Board comprise either ‘appointees’ or ‘nominees’ of the Central Government. No appointment/nomination is made by GOI after getting a prior undertaking from the prospective candidates about falling in line with the finance ministry’s policy perceptions. So, once on Board or in Office the individuals apply their mind and express their views without allegiance to their ‘employers’.
M G Warrier, Thiruvananthapuram


The recently nominated Director, S.Gurumurthy has reiterated the demands made from the Ministry and certainly he may try to recruit a few more Directors to support the Government cause. It is very much doubtful whether any of the other Directors go out of the way to support the stand of the RBI though the Central Bank has no secret agenda except to perform the role assigned to it under the RBI Act as the circumstances warranted.
So far,it has not been easy to influence RBI to change its course in favour of vested interests. Even the Committee approach via FSLRC didn't succeed.

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