Govt Sends Letters to RBI Invoking Section 7 of RBI Act

Govt Sends Letters to RBI Invoking Section 7 of RBI Act

"It is hard to believe that the RBI governor will resign because it is unprecedented and would look quite irresponsible and (an) immature step", said a senior trader at a foreign bank.

The development comes amid a widening rift between the Modi government and Patel after the central bank's Deputy Governor Viral V Acharya in a speech on Friday, 26 October, warned that undermining autonomy and independence of RBI could be "potentially catastrophic". "The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions", he said. "Governments in India have nurtured and respected this", the economic affairs department of the finance ministry said in a statement. If it's actually invoked, it could undermine the RBI's autonomy and RBI Governor Urjit Patel reportedly may step down.

The Indian government has invoked never-before-used powers under the RBI Act allowing it to issue directions to the central bank governor on matters of public interest, the Economic Times reported on Wednesday. "For the goal, extensive consultations on several issues take place between the Government and the RBI from time to time", it added.

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In his strongest criticism of RBI yet, Finance Minister Arun Jaitley on Tuesday had hit out at the central bank for failing to check indiscriminate lending during 2008 and 2014 that has led to the present bad loan or NPA crisis in the banking industry.

However, there was no sign of resignation by Patel at the meeting, officials said. This is equally true of all other regulators. Another report in the Times of India said the government had mentioned the rule to the RBI in consultations, without invoking it.

From the tone of Acharya's speech, it appeared that the RBI is under tremendous pressure to hand over its surpluses squirrelled away over years and hence its decision to take the issue to the people.

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Backing the deputy governor, AIRBEA said that "Acharya had spoken more in disgust and despondency due to continuous nibbling by the government and the ministry of finance". The government, through these consultations, places its assessment on issues and suggests possible solutions.

While speculation abounded on Wednesday about whether the government had invoked Section 7 of the RBI Act, which would give the government the ability to direct the central bank's actions, the Finance Ministry remained studiously silent on the issue.

"The markets have taken these developments in their stride as there is an inherent belief that the central bank is independent and will continue with its rules-based mandate, whilst the government focuses on reforms and looks to buoy growth, drawn also by the approaching elections". Section 7 deals with "management" of RBI.

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