Electoral bonds and RBI — a case study on autonomy of central banks

The Supreme Court verdict on February 15 is a startling reading on how governments achieve their political objectives using the central bank and the banking system.
Last Updated : 20 February 2024, 05:27 IST

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The recent Supreme Court judgment declaring electoral bonds unconstitutional has created a fervour in sections of the media. The discussions have varied from politics around the bonds to cleaning up the financing of elections.

The judgment records the several objections made by the Reserve Bank of India (RBI) on the bonds scheme and the government’s responses towards the objections. While the RBI objections were reported in the media earlier, the judgment adds credibility to the central bank’s friction with the government over the scheme.

In this article, we analyse this objection-response between the government and the RBI.

Currency and money laundering

The RBI objected that the electoral bonds resembled currency. The government proposed that scheduled commercial banks could issue electoral bonds. The RBI objected saying the bearer bonds resemble the functions of currency. If the SCBs issue bearer bonds, it will undermine the RBI’s authority to issue currency. Under Section 31 of the RBI Act, only RBI can issue bearer bonds.

The government responded that bonds will not resemble currency as they will be redeemed over a limited time. Further, Section 31 of the RBI Act was amended saying that the Union government may authorise any scheduled bank to issue electoral bonds.

The RBI objected because electoral bonds could facilitate money laundering. Under electoral bonds the identity of the donor was to be kept anonymous. The RBI noted that while the identity of the purchaser of bonds would be known to the issuing bank, the identity of intervening persons would not be known. The RBI also flagged the possibility of shell companies misusing bearer bonds.

The transactions under electoral bonds could lead to money laundering, thus negating the principles of the Prevention of Money Laundering Act (2002, PMLA). The PMLA is a serious issue which has national and international agencies working together to counter the menace of black money. For the RBI to see a government policy as leading to PMLA was quite an objection in itself. the RBI’s central board commented that “the electoral bond may not only be seen as facilitating money laundering but could also be projected (albeit wrongly) as enabling it”.

The Narendra Modi-led Union government ignored the money laundering concern, and said that the RBI did not understand the purpose of the bonds. The purpose was to get electoral funds from tax-paid money and keep the identity of the donor a secret.

Credibility and usage

The RBI objected to SCBs issuing electoral bonds because it would question the credibility of financial system. The government was of the view that SCBs issue bonds, while the RBI noted that only the RBI’s Mumbai office should issue these bonds. The government ignored the concerns over credibility as well. Instead of all SCBs, it permitted just the State Bank of India to issue the bonds. The SBI notified 29 branches across all the states and Union Territories to issue the bonds. 

Given the government mandate to issue electoral bonds, the RBI suggested designs and rules for selling electoral bonds: it suggested that the bonds could have a maximum tenure of 15 days and issued in multiples of Rs 1,000, 10,000, and 1 lakh. It also suggested that it be available in the digital form only and the scheme be opened twice a year for seven days each.

The government the maximum tenure of bonds at 15 days; but it added the denominations of Rs 10 lakh and Rs 1 crore, opened it for four times a year (January, April, July, and October) for 10 days each, with an additional month in the year a general election is held. The bonds were kept in physical form which were non-refundable.


The Supreme Court judgment is quite a startling reading on how governments achieve their political objectives using the central bank and the banking system. The period around the time the electoral bonds scheme was passed was marked by constant friction between the Union government and the RBI. It started with demonetisation (in 2016), followed by electoral bonds and sharing of central bank reserves. These led to the infamous resignations of then RBI Governor Urjit Patel in 2018 and then Deputy Governor Viral Acharya in 2019 before the completion of their tenures. 

At the end of the day, the autonomy of the RBI is determined by the Government of India, and the central bank officials can just try and preserve the autonomy. The saga of electoral bonds and the RBI should go down as an important case study on the autonomy of central banks. Oddly, a government which claims that it gave the RBI more autonomy by giving it an inflation-targeting framework weakened the RBI’s autonomy by pushing it to engage in demonetisation and electoral bonds.

We might have learnt of the details that led to the friction over electoral bonds only when the RBI History Volume for this period would have been written many years from now, but thanks to the Supreme Court judgment, we know about it now. The judgment shows that even if the RBI lost the battle of electoral bonds, it won the war of trying to retain the central banks’ autonomy despite the odds.

Amol Agrawal is an economist teaching at Ahmedabad University.

(Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.)

Published 20 February 2024, 05:27 IST

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