On August 11, the Reserve Bank of India (RBI) issued three press releases re-nominating four directors to the Central Board of the bank. As per RBI Act (1934), ‘the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors’. The Act adds that the central board to have 21 directors: one Governor, four Deputy Governors, ten Directors who are experts from different fields, two government officials and four directors from local boards. The Governor and the four Deputy Governors are official directors whereas other 16 are non-official directors. The central government appoints all the 21 directors to the board.

The case of local boards is interesting. RBI has local boards for the four major regions—northern, southern, western and eastern. The government appoints five members to each of the four local boards and the local boards then nominate one member to the central board. The idea behind the local boards is to add regional diversity to the Central Board.

On analysing the current breakup of the Central Board, we see that it has 15 directors. The missing directors are from outside experts category (four) and local boards (two). Within local boards, northern has two members and eastern has one member. The RBI website says that the local boards in the western, eastern and southern areas are not functioning due to lack of quorum. Only the northern board is functional.

While it is perfectly fine to have these positions remain vacant once a while, it has become more of permanent feature of late. The RBI board is a very important governance body as it makes all the major decisions pertaining to the central bank.

The importance of the RBI central board was seen during the 2016 demonetisation. De facto, the government announced demonetisation, but de jure, it was done by the central board. Section 26 (2) of the RBI Act says that ‘On recommendation of the Central Board the Central Government may, by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender.’ The government used this section and demonetised 500 and 1,000 rupee notes as legal tender.

It is interesting to note that on the eve of demonetisation, the RBI board had just 10 filled positions. It is unclear how such an eminent board took such an important decision of enormous consequences with less than 50% board membership? RBI had raised concerns over the rising vacancies in the central board. Raghuram Rajan, in his last speech as RBI Governor, highlighted the important oversight role played by the board, and said “Vacancies in the RBI Board, which have remained unfilled for many months now, should be filled quickly so that the full expertise and oversight of the Board can be utilized.”

The RBI board continues to remain without full strength. It is difficult to track the RBI board’s occupancy real time because of retirement and appointments/ reappointments. One way to track the board is via RBI’s annual reports. RBI annual reports show that the board has not been full in any of the years since demonetisation. The occupancy was 17 in 2017-19 and fell to 11 in 2020-21.

Currently, it is at 15. The unfilled positions are always from the categories of local boards and external experts. The economy has faced multiple crises in this period, from the banking crisis to the pandemic, and a fuller board if not a full one would have helped RBI tide through the crises better. The reappointments are also not time-bound. The tenure of two non-official board members ended on August 7, 2022, but they were reappointed four days later, on August 11, 2022. These crucial reappointments need to be planned and decided well in time.

Apart from unfilled board positions, the appointment rules need to be amended. As per the RBI Act, the Governor and Deputy Governors cannot have a term more than five years, and are eligible for reappointment. The directors appointed from local boards and external experts have a term of four years and can be reappointed only for two terms or eight years (either continuously or intermittently). The two government nominees shall hold office under the pleasure of the central government! Ideally, both official and non-official directors should be given a long term, fixed and non-renewable contract. Long term and fixed means the tenure should be for a reasonable period and the government cannot remove/disqualify the directors barring for serious misconduct. Typically, the government appoints Governors/ Deputy Governors for three years, which is really short. A non-renewable clause will strengthen the autonomy of the central bank as officials will not seek a second-term.

Roman author Juvenal famously asked ‘Who will guard the guardians?’, which has led to the philosophical question as to how power can be held to account. The central bank is a guardian of our monetary system and thus is very powerful. The central board not just guards the guardian, but also holds it accountable too and can play its role effectively but only if the members are in adequate number.

The writer is Assistant professor, economics, Ahmedabad University