Sensing Fears, Shifting Gears: Did the RBI Steer in the Wrong Way?

[By Ujjwal Jain]

The author is a third year student of Tamil Nadu National Law University.

One of the most important functions of any central bank is to formulate and execute monetary policy. In our case, the Reserve Bank of India (“RBI/Bank”), the banking regulator and India’s central bank, is statutorily entrusted with this responsibility.[i] Monetary policy refers to the policy of the central bank with regard to the use of monetary instruments under its control to primarily achieve the goals of price stability, which is a precondition for sustainable growth. Some of the monetary instruments include repo rate and reverse repo rate[ii] and they influence the cost and availability of money in the economy.[iii]

The RBI had recently (in April 2020) reduced the reverse Repo Rate without convening and consulting the Monetary Policy Committee. The author analyses the statutory prescriptions which the RBI has violated in doing so and contemplates for a possible solution.

Legal Background

The preamble of the RBI Act, 1934 (“RBI Act”) enunciates that the rationale for constituting the central bank is to secure monetary stability in India, secured by way of monetary policy.

 As macroeconomic conditions change, a central bank may change the rates of the instruments in its monetary policy. Until 2016, a Technical Advisory Committee consisting of the Governor, Deputy Governor, and advised by external advisors would decide on the rates of various instruments. Notably, the decision(s) of the advisors were not binding on the RBI and the Governor’s decision was final.

In 2016, Chapter III-F was inserted[iv] in the RBI Act by way of an amendment and a Monetary Policy Committee (“MPC”) was constituted (“2016 Amendment”).[v] The 6-member Committee was entrusted with the responsibility to determine the policy rate[vi] and its decision(s) were made binding upon the RBI.[vii] The reason for coming up with MPC can be traced to the Report of an Expert Committee[viii] which took cognizance of the ‘monopoly power’ in deciding the monetary policy and batted for communication and transparency in the monetary policy framework. It is believed that democratic societies require public institutions to be accountable.[ix]

The Financial Sector Legislative Reform Commission in its Report submitted to the Ministry of Finance in March, 2013, had also echoed the same tone. It had flagged concerns of autonomy and independence and posited that achieving independence of a central bank requires appropriate institutional design and thus, recommended constituting MPC.[x]

Notably, in the time before the constitution of the MPC, the Governor of the RBI was vested with enormous powers and the 2016 Amendment strived to overcome this shortcoming; thus, ensuring no abuse of power. It is noteworthy that the MPC framework is structured in such a manner that autonomy and independence of the Committee are vouchsafed. For instance, though the Central Government can “convey its views” to the MPC[xi], but the same has not been made binding upon the MPC’s or the RBI’s decision. The modus operandi of management of the RBI is enshrined in Section 7(2) of the RBI Act, which states that:

“..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.”

Clearly, only with the exception to the monetary policy, the Central Board of the RBI is entrusted with over-arching powers.

Do lofty ideals justify faux measures?

The RBI (as prescribed[xii] in Chapter III-F, 1934 Act) convenes MPC meeting and decides upon the rates of various monetary policy instruments. The Secretary of the MPC releases the policy resolution & statement and the minutes of the MPC meeting in the manner prescribed. The RBI is then, under Section 45 –ZJ of the RBI Act, mandated to take steps to implement the decision of the MPC.

Surprisingly, in April 2020, the RBI had suo moto reduced the reverse repo rate under the Liquidity Adjustment Facility (LAF) without convening & consulting the MPC. Due to the Covid-19 pandemic, which is having a cascading effect on liquidity in the market, though the above move seems to be a much-needed one, it raises eyebrows as the RBI has patently transgressed the statutory prescription by not consulting MPC.

Furthermore, Regulation 5(b) of the MPC Regulations, 2016 prescribe ‘ordinarily’, 15 days’ notice should be given to the members of the MPC to convene a meeting, the Regulations also allow flexibility to convene an “emergency meeting” by giving “a 24 hours’ notice” to every member “to enable him/her to attend, with technology-enabled arrangements.”[xiii] Despite a framework which gives such great latitude that it can convene an ‘emergency meeting’, if the exigency of a situation so demands, the RBI has gone ahead and tinkered with the rates without taking MPC into confidence, thus disregarding the mandate of the RBI Act.

The April 17th Notification declares the reduction of reverse repo rate in the following words:  “it has been decided to reduce the fixed-rate reverse repo rate under the LAF by 25 basis points from 4.0% to 3.75% with immediate effect. It is unclear from the statement of the RBI Governor on how the decision was reached. Ironically, the Governor concludes his statement with the following words: “…without infringing in any way on the mandate of the MPC”, but by what it has done it has committed a “regulatory overreach” and the same is ex facie contra legem, therefore, takes us back to the pre-MPC times.

Can the RBI’s move be justified?

At this juncture one might argue that the RBI, by virtue of the Banking Regulation Act, 1949, has been vested with the powers to issue directions to banking companies “in the public interest and in the interest of banking policy” and is also empowered to “control advances by banking companies” and every banking company shall be bound to comply with such direction(s).[xiv] This read with Section 17(15-A)[xv] of the RBI Act [which provides for the RBI to perform its duties enshrined under the RBI Act conjointly with “any other law for the time being in force”] may look convincing in the first blush.

However, it would be wrong to jump to a conclusion by pursuing the aforementioned line of argument, as the MPC has been vested with a special function viz. to frame the monetary policy, and will prevail over the general duties and functions set out in the Banking Regulation Act. This is in tandem with the cardinal principle of interpretation generalibus specialia derogant, meaning special things derogate from the general.

It would be worthwhile to mention that, the provisions of Chapter III-F of the RBI Act, 1934 have been given an overriding effect[xvi] – but the same is only in context to the provisions of the RBI Act and not to ‘any other Act for the time being in force’ and it would make things clearer if the overriding effect is extended to the Banking Regulation Act or any other law for the time being in force. This would leave no scope for an iota of doubt that the task of framing the monetary policy rests only with the MPC.

Bitter past experiences

The RBI has been caught in the wrong side of controversy for acting beyond its limited power, although the same was done to achieve laudable motives. For example, when the banking regulator had issued directions in an attempt to resolve the crisis surrounding non-performing assets, it had directed the NCLT to ‘give such cases a priority’. Though a corrigendum was issued to rectify this, the Gujarat HC came down heavily on the regulator and had asked it to be “careful” while issuing press release(s). The HC opined that such press releases whenever issued, “must be in consonance with the constitutional mandates and based upon sound principles of law.”[xvii]

In another instance, the Apex Court had just stopped short of issuing a contempt notice against the RBI Governor, when the central bank had refused to disclose wilful defaulters’ list and annual inspection reports under RTI,[xviii] on the grounds of economic interest and withholding such information in a fiduciary relationship with these individual banks. This was done by the RBI in spite of the earlier directions of the SC where it had opined that the RBI ought to act with transparency and not hide information that might embarrass individual banks.[xix]

Way Forward

At a time when more hands and minds are needed to monitor the evolving situation continuously, it is pertinent to ask why the RBI is working with three Deputy Governors when the RBI Act under Section 8(a) prescribes (and the usual practice is) for four such posts. There are also no provisions in the RBI Act which empowers the Central Bank to ‘supersede’ the MPC, as it has under Section 36ACA of the Banking Regulation Act – the power to supersede Board of Directors of any Banking Company.

The RBI Act under Section 58A also attempts to protect its decisions and actions taken in ‘good faith’ by barring the institution of a suit, prosecution, and legal proceedings against the regulator. Such a provision is found in the statutes of various financial sector regulatory bodies, like IRDAI, SEBI, PFRDA, and IBBI.

The question which arises now is, what is the solution possible? Can the MPC be asked to ‘review’ the decision of the RBI? Technically this route cannot be adopted as Section 45 ZH of the RBI Act mandates the RBI to provide all information to the members of the MPC relevant to achieve the inflation target, on the basis of assessment of which, the Committee takes a decision. Treading as per the RBI Act, a meeting of the MPC has to be convened to decide upon changing of the rates of the monetary policy instruments.

In the light of simon-pure clear provisions, what the RBI has done definitely brings it into the spotlight.

The Author would like to express his gratitude to Shri Akshay Sharma [student, NUSRL] for reviewing the article and providing valuable inputs. This article is a product of the inspiration drawn from the lectures & writings of Advocate Shri Somasekhar Sundaresan.

End Notes

[i] Preamble of the RBI Act, 1934 (for brevity RBI Act”) states that:

                 “…the monetary policy framework in India shall be operated by the Reserve Bank of India.”

[ii] Instruments of Monetary Policy, available at

[iii]Goal(s) of Monetary Policy, available at

[iv] Amendment by Act No. 28 of 2016, S. 222 (w.e.f. 27-6-2016).

[v] Section 45-ZB(1), RBI Act, 1934.

[vi] Section 2(ccc-i) r/w Sec.17(12-AB), RBI Act, 1934.

[vii] Section 45-ZB(3), RBI Act, 1934.

[viii] RBI, Report of the Expert Committee to revise & strengthen the Monetary Policy Framework (January 2014), Committee Chaired by Shri Urjit Patel.

[ix] Ibid., Chapter II: Revisiting the Choice of Nominal Anchor for India’s Monetary Policy, p. 22.

[x] Ministry of Finance, Report of the Financial Sector Legislative Reforms Commission, p. 103-104.

[xi] Section 45-ZI(9), RBI Act,1934.

[xii] Reserve Bank of India Monetary Policy Committee and Monetary Policy Process Regulations, 2016, w.e.f. 14.07.2017 (for brevity MPC Regulations).

[xiii] Ibid. In fact two members of the MPC did participate the MPC meeting scheduled on March 24, 26 & 27 through video conferencing. See ‘Minutes of the Monetary Policy Committee Meeting March 24, 26 and 27, 2020’ published on April 13, 2020. Access it here.

[xiv] Sections 21 & 35A of the Banking Regulation Act, 1949.

[xv] Inserted by way of an amendment by Act No. 23 of 1955.

[xvi] Section – 45-Z, RBI Act, 1934.

[xvii] Essar Steel & Anr v. RBI & Ors., (2018) 208 Comp Cas 101 : (2017) SCC OnLine Guj 995 ¶45A.

[xviii] Girsih Mittal v. Parvati V Sundaram & Another, 2019 SCC OnLine SC 607.

[xix] Reserve Bank of India v. Jayantilal N. Mistry, (2016) 3 SCC 525.


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