"Consultations With RBI In Public Interest": Government Amid Autonomy Row

31 October, 2018, 11:56 | Author: Dave Hampton
  • Arun Jaitley

The Centre has invoked Section 7 of the BI Act that empowers it to give instructions to the RBI Governor in order to act on certain issues.

Tensions between the RBI and the government have spilled into the public domain after Deputy Governor Viral Acharya said last week that undermining central bank independence could be "potentially catastrophic", indicating the authority is pushing back against government pressure to relax its policies and reduce its powers ahead of a general election due by May.

There is an "irreversible breakdown between RBI governor and the government", one of the source added. What's interesting is that the following Section of the RBI Act has never been used by any government post the independence of India.

Far-sighted government leaders may be able to reap benefits of convincing voters about the importance of investing in macro-economic stability; for instance, by claiming credit for the long-term nature of financial sector outcomes attained by allowing the central bank autonomy in decision-making and delivery of its core functions. RBI and the government have reportedly been at the loggerheads over several issues including the government demanding ease in lending rules for at least 11 banks under prompt corrective action (PCA) framework, while the regulator thinks otherwise.

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He added, "We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013".

BJP slammed Rahul Gandhi for his criticism against Prime Minister Narendra Modi over the RBI-Centre rift, and said that it reflects Congress party's grounding, "which is fast eroding in national politics". His remark only inflamed the ongoing row between the RBI and the government.

Patel and his deputy governors are expected to meet top finance ministry officials on Friday.

Senior government officials said the RBI's guidelines on NPAs were not only stringent but "too harsh", and could have serious ramifications on industries such as MSME and power.

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Sources in the ministry of finance told Firstpost that Section 7 of the RBI Act has not been invoked. Delivering the AD Shroff memorial lecture on Saturday, Acharya said governments that did not respect their central banks' independence would sooner or later incur the wrath of financial markets.

Government officials were "very upset" with the RBI for publicly talking about a rift with the government, fearing it could tarnish the country's image among investors, Reuters reported.

Union Finance Minister Arun Jaitley during a press conference in New Delhi.

The report claimed that the government had sent letters to the RBI governor in recent weeks exercising powers under section 7 of the RBI Act on issues ranging from liquidity for non-bank finance companies, capital requirements for weak banks and lending to small- and medium-sized companies.

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