Wednesday, 22 May, 2019


Finance Ministry declares truce, but signals displeasure at RBI's behaviour

Finance Ministry declares truce, but signals displeasure at RBI's behaviour Finance Ministry declares truce, but signals displeasure at RBI's behaviour
Conrad Doyle | 31 October, 2018, 10:47

With the war between the Narendra Modi-led NDA government and the Reserve Bank of India (RBI) escalating, there is apprehension that the government may invoke Section 7 of the RBI Act. "If indeed govt has issued directives to the RBI then its governor should resign forthwith".

With Government invoking the never used section, the central bankers feel that it will leave the very little scope of the bank to work in the way they deem to be fit. But at the same time, there is an unmistakable sense of displeasure and warning from the government when it says that it frequently consults with RBI on important matters but never goes public with these matters.

According to reports, sources said that Letters of Consultation under Section 7 of the RBI Act were invoked 3 times. In contrast, a central bank plays a test match, trying to win each session but, importantly, also survive it so as to have a chance to win the next session, Acharya had said.

According to latest reports, Ministry of Finance released a statement which said, "Both the government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy".

The development comes amidst growing rift between the centre and the central bank after the RBI deputy governor Viral Acharya, in a fiery speech, warned that undermining a central bank's independence could be "potentially catastrophic".

The counsel representing RBI had said that Section 7 of the RBI Act "embodies and puts in place a forum for resolution of all questions and is in one sense the repository mechanism for dealing with issues which constitute a "conflict zone".

Representatives at the Reserve Bank weren't immediately available for comment. Arguing against the Centre's proposal, the RBI had said, "The digital payments have made good and steady progress".

Reports about Urjit Patel stepping down as the RBI governor started floating following Finance Minister Arun Jaitley's scathing criticism of the central bank's "lending spree", reports quoted sources as saying on Wednesday. The government believes that easing restrictions will boost lending and increase growth. "There have been talks with the RBI on these issues, but invoking Section 7 (1) is something that has not come up yet but we need to also ensure that industries are not killed", he added. In response, RBI Governor Urijit Patel had blamed regulatory constraints as the RBI's powers to regulate public sector banks is limited. "The government respects the autonomy and independence of the RBI but they must understand their responsibility", the official added.

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