Judicial review of central banks: An Indian perspective

Central banks are unique institutions. Their peculiar functions have profound implications for the economic health of modern nation states. Since the late 1980s, there has been growing international recognition of the importance of central bank independence (‘CBI’), ie, the need for independence of a central bank from its country’s executive government. CBI insulates the central bank from short-term political pressures so that it may effectively pursue the long-term objective of price stability. Some jurisdictions have formally enshrined CBI in their primary legislation. Effectively, central banks have come to enjoy a relatively superior status—de jure or de facto—compared to other regulatory institutions in many countries.

CBI is, however, only one side of the coin. In a democratic polity, a central bank ought to be accountable for its actions. Accountability does not necessarily politicise a central bank. Instead, an accountable central bank must give account, explain, and justify its actions or decisions against some tangible criteria. It must also take responsibility for any damage or consequence that follows from its actions. Some scholars have, therefore, advocated for ‘accountable independence’ of central banks.

In view of their profound economic significance, relatively superior regulatory status, and the need for ‘accountable independence’, judicial review of central bank actions raises thorny issues regarding the appropriate zone of judicial deference. On the one hand, the legitimacy of judicial review itself suffers when it appears to second guess actions undertaken by an ‘independent’ central bank purportedly in the greater interest of macroeconomic or financial stability. On the other hand, excessive judicial deference towards an unelected, technocratic institution such as the central bank appears incongruent with the idea of institutional accountability in a liberal democracy, based on rule of law and separation of powers.

A recent trend in India is significant from this perspective. The frequency of judicial review of Central Bank’s actions appears to have substantially increased in the recent past. The figure below plots the total number of matters (disposed as well as pending) filed before the Indian Supreme Court per year from 2000 to 2021, where the Reserve Bank of India (‘RBI’) appeared as a respondent. It shows an increasing trend of judicial review involving the RBI since 2015, with a marked increase from 2017.

In a recent paper (full version), I attempt to contextualise this empirical finding against the evolving nature of judicial deference shown by the Supreme Court of India towards the RBI. I argue that traditional RBI functions involving balance-sheet operations as well as regulatory actions against regulated entities have usually been uncontested, giving the Supreme Court relatively fewer opportunities to review the RBI’s actions. Even on the rare occasions when the RBI’s regulatory actions have been challenged before the Supreme Court, judges have been extremely deferential towards the central bank from 1960s to late 1990s.

With the turn of the century, the enactment of the Right to Information Act 2005, coupled with the credit boom from 2004-2008, paved the path for the first exogenous event that compelled the RBI to refuse the release of information obtained from its regulated banks. This was a tangible regulatory action, much beyond traditional central banking activity, which exposed the RBI to a serious judicial review challenge. In parallel, the report of the Financial Sector Legislative Reforms Commission (FSLRC) and the ensuing Srikrishna-Rajan debate during 2013-14 raised the prominence of judicial review of the RBI in the public discourse. Various subsequent exogenous events such as demonetisation, enactment of the Insolvency and Bankruptcy Code 2016, emergence of cryptocurrencies and the Covid-related financial stress, compelled the RBI to issue legal instruments that directly impacted various stakeholders beyond its immediate jurisdiction. These aggrieved stakeholders increasingly challenged those impugned RBI actions. This explains the increase in judicial review challenges involving the RBI before the Supreme Court since 2015 as observed in the figure above. Increasing instances of active judicial interventions in the regulatory functioning of the RBI since 2015 also provide evidence of the eroding judicial deference towards the RBI at least on the regulatory (process) aspects, if not as much on the substantive economic policies themselves.

I argue that judicial review challenges involving the RBI’s actions could potentially arise from three different categories of central banking functions:

(a) Balance sheet operations (such as asset purchase and lending to banks);

(b) Issuance of currency (including withdrawal of legal tender status); and

(c) Other regulatory functions (primarily regulation of banks and other financial institutions)

The experience with RBI however suggests that judicial review challenges with respect to category (a) are rare. Judicial review challenges with respect to category (b) have arisen usually when the legal tender status of bank notes has been withdrawn in 1978 and 2016. The overwhelming variety of judicial review challenges, however, appear to have arisen from category (c). In other words, the RBI faced a spectrum of judicial review challenges before the Supreme Court mainly in its role as a regulator of banks and other financial institutions. In this role, the RBI has been experiencing increasing instances of active judicial intervention since 2015, which also appears to be correlated with a gradual erosion in the earlier norm of judicial deference towards the RBI. At times, the Supreme Court has imposed higher standards of regulatory governance on the central bank, while on some occasions it has rewritten the RBI’s regulations.

Although the paper itself is a descriptive one, its findings may hold potential policy lessons. For instance, policymakers need to appreciate that entrusting a central bank with more functions could lower the judicial deference towards such central bank and have consequences for its ‘independence’. This may be especially true of jurisdictions with low state capacity, where setting up and sustaining independent institutions tends to be more challenging.

Pratik Datta is a Senior Research Fellow at Shardul Amarchand Mangaldas & Co.