UPSC Prelims 2021 Q1: Indian Economy – Banking & Financial Sector
- (a) 1 and 2 only
- (b) 2 and 3 only
- (c) 1 and 3 only
- (d) 1,2 and 3
Answer: (c) 1 and 3 only
Explanation
RBI Governor: Appointment, Directions and Legal Basis
| Statement | Claim | Verdict | Detail |
|---|---|---|---|
| 1 | RBI Governor is appointed by the Central Government | TRUE | Under Section 8(1)(a) of the RBI Act, 1934, the Governor and Deputy Governors are appointed by the Central Government on the recommendation of the Financial Sector Regulatory Appointments Search Committee (FSRASC). |
| 2 | Constitution gives Centre power to issue directions to RBI in public interest | FALSE | There is no such provision in the Constitution. The power to issue directions comes from Section 7(1) of the RBI Act, 1934 (a statute), not the Constitution. Section 7 has been invoked rarely. |
| 3 | RBI Governor draws power from the RBI Act | TRUE | The RBI Act, 1934 is the statutory source of the Governor's powers, functions and tenure. |
Only statements 1 and 3 are correct.
Answer: (c) 1 and 3 only.
Why each option is right or wrong
- (a) Incorrect. Statement 2 is wrong. The power to issue directions is in the RBI Act (Section 7), not the Constitution.
- (b) Incorrect. Statement 1 is a documented fact - the Central Government appoints the Governor under Section 8 of the RBI Act.
- (c) CORRECT. Statements 1 and 3 are true. The Governor is appointed by the Centre and derives authority from the RBI Act. Statement 2 wrongly attributes direction-issuing power to the Constitution.
- (d) Incorrect. Statement 2 is false. Direction-issuing power to RBI comes from a statute (RBI Act), not the Constitution.
Key point
RBI Governor: appointed by Central Government under Section 8 of RBI Act, 1934. Constitution does NOT mention RBI. Direction-issuing power lies in Section 7 of the RBI Act (statutory, not constitutional).
Remember
The RBI Governor is appointed by the Central Government under Section 8 of the RBI Act, 1934. The RBI Act (not the Constitution) is the source of both the Governor's power and the Centre's power to direct the RBI. Statements 1 and 3 correct.
Common mistakes
- Confusing RBI's statutory basis with a constitutional one. The RBI is a statutory body under the RBI Act, not a constitutional body.
- Thinking Section 7 has never been used. It was invoked in the RBI-Government standoff of 2018.
- Assuming the Governor is appointed by the President. The Central Government (through the Appointments Committee of the Cabinet) makes the appointment.
Exam tip
Constitutional vs statutory bodies test: RBI, SEBI, IRDAI are statutory. UPSC, ECI, CAG, Finance Commission are constitutional. If a body is not named in the Constitution, direction-issuing power over it cannot be a constitutional provision.
Sources
- Reserve Bank of India Act, 1934 - Sections 7 and 8
- Reserve Bank of India - About Us: Organisation and Governance