ibusinesslines.com November 14, 2018

Modi Government Said To Cite Never-Used Powers In Talks With RBI

31 October 2018, 10:48 | Kelvin Horton

Explainer: Why the RBI and the central government are in a public spat

RBI vs Government: Urjit Patel may resign as governor after Centre invokes never-used powers

On October 27, Finance Minister Arun Jaitley said, "I think, for any regulatory mechanism, stakeholder consultation has to be of a very high quality, which will probably lead to a revisiting of traditional thoughts and opinions". But the government had decided against using this provision at that time. While there are reports suggesting that the Centre has already invoked Section 7 of RBI Act, it still remains unclear on how it will be used.

The government has invoked never-before-used powers under the RBI Act that allow it to issue directions to the central bank governor on matters of public interest, the Economic Times newspaper reported.

In open letter, All India Reserve Bank Employees Association says govt must desist from nibbling at central bank's autonomy and let it do its job in an unfettered way, else it will incur the wrath of financial markets.

It, however, underlined that both the government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. 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. "For the objective, extensive consultations on several issues take place between the Government and the RBI from time to time", it added.

The latest development follows a Friday speech by Deputy Governor Viral Acharya warning of the risks of political leaders encroaching on the central bank's independence.

This section has never been invoked in the history of independent India despite numerous clashes between the government and the RBI over the years. However, they added, there has been no talk of invoking Section 7 (1).

Government officials said they were surprised that Patel, who was appointed by the Modi administration in 2016 and initially cooperated with the government, is creating tension when the Centre is facing criticism over its handling of the economy before the 2019 General Elections. Reserve Bank case emphasising that "the Reserve Bank, apart from it being a reasonable body, is answerable to the Central Government, and the public opinion is certainly strong and vocal enough for it to heed". The official said Patel may face a tough time when he appears before a parliamentary standing committee on November 12. 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. "The government respects the autonomy and independence of the RBI but they must understand their responsibility", the official added.

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