RBI autonomy is ‘essential, accepted governance requirement’: Finance Ministry

Randal Sanchez
October 31, 2018

The government has invoked Section 7 of the Reserve Bank of India (RBI) Act.

Government officials have also called for relaxation of strict RBI lending rules for weak banks and are trying to trim the RBI's regulatory powers by setting up a new payment regulator.

The court observed that if the RBI and the government are at variance on any policy or regulatory issue, the latter should "consider whether the circumstances warrant the initiative of the consultation process" under Section 7 of the RBI Act. (2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank. Another report in the Times of India said the government had mentioned the rule to the RBI in consultations, without invoking it.

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Section 7 says that "the Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest", a statute that has not been used in independent India, according to the Economic Times. "Governments in India have nurtured and respected this", the government statement said. On Friday night, the RBI Deputy Governor Viral Acharya warned that undermining a central bank's independence could be "potentially catastrophic", in an indication that it is pushing back hard against government pressure to relax its policies and reduce its powers. "For the objective of extensive consultations on several issues take place between the government and the RBI from time to time". The government believes that easing restrictions will boost lending and increase growth.

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". If it's actually invoked, it could undermine the RBI's autonomy and RBI Governor Urjit Patel reportedly may step down. "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.

Finance Minister Arun Jaitley, meanwhile, has blamed the RBI's inability in identifying the problem of NPAs in Indian banks and lack of timely measures for the current crisis-like situation in the banking sector. According to ET Now, Patel had told government not to "raid RBI reserves", as government was keen on the transfer of reserves to fill up its fiscal deficit amid NPA stress.

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