Some days ago in AIFW, there was a brouhaha over govt issuing directions to RBI with the intention of disciplining it. The media, (since it was against Modi) it picked the fight by the usual statement of “This has been never done before”. (I normally call people who use this term as “Elitist Swine”.) Then the discussion in that thread quickly escalated into keyboard wars, with the fight going into totally unrelated territories of reservations, NEFT, RTGS etc…

The RBI comes under central govt. Hence, govt has the power to issue directions. In the same way, RBI has the power to issue directions to financial intermediaries. Ex.: NBFC, Banks, Authorised Dealers etc… But the directions are issued after consultations and its always in written form. This is done in public interest. Currently that public interest is of averting the crisis of IL&FS default spreading.

The other flash point was regarding Payment and Settlement Systems. The RBI was made Payment and Settlement System regulator( in short PSS) after the passing of Payment and Settlement System Act 2007. According to this, the RBI started BPSS(the board) and DPSS(the department) to discharge these functions. The department was to assist the board in discharging its duties.

The RBI’s central board of directors met recently to discuss the directions issued by the govt. It couldn’t pass a resolution regarding it. S Gurumurthy (a board member) was quoted saying there was agreement on 4 or 5 points. Essentially rendering the media war, just a gimmick to pick a fight. Here are lessons one should learn from this whole exercise.

Lessons:

  • Sending directions is like disciplining. It’s not worthy of creating controversy.
  • Directions are issued in public interest by all regulating bodies.
  • The provisions for issuing directions are laid down in the act itself. This means lawmakers knew these to be essential when they wrote it.
  • RBI gets its powers from the RBI Act and other Acts passed giving powers to it.
  • The Central Govt is the owner of RBI and has control over it.
  • The RBI and others have Subordinate Legislative Powers. The Centre has power roll back their rules.
  • Always suspect the news media, as you will be misled by their biased reporting.
  • Always consider 3 different points of views before coming to conclusion.