Autonomy of Reserve Bank ‘essential’, says finance ministry

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New Delhi, Oct 31: As the RBI-vs-government spat intensified on Wednesday, the Centre issued a statement asserting that autonomy of the central bank is essential within the framework of the RBI Act. The governments in India have “nurtured and respected” the governance requirement, it said in a statement.
Multiple media reports on Wednesday said the government has invoked Section 7 of the RBI Act, a law allows it to issue directions to the RBI Governor in matters adhering to public interest.
“Both the government and the central bank, in their functioning have to be guided by public interest and the requirements of the economy,” it said, adding that the extensive consultations between the two entities is a commonplace.
The government from time to time places its assesments on issues and suggestion solutions and will continue to do so, according to the statement. “The Government of India has never made public the subject of those consultations.”
The Centre has reportedly sent letters to RBI governor Urjit Patel in the recent weeks, exercising its powers under this section, on various issues like liquidity crunch in the NBFC sectors, capital requirement for banks and lending to small and medium enterprises.
Section 7 has never been used in India, not even during the 1991 Indian economic crisis when the country was close to a default.
Relations between the government and the RBI have gone downhill over the past few months, with the government unhappy with the central bank’s interest rate policy, and its decision to invoke the ‘prompt corrective action’ framework that restricts lending by NPA-hobbled banks, among others.
What is Section 7?
Section 7 of the RBI Act, when invoked, allows the government to consult with and give instructions to the Governor of the RBI on certain issues that it believes are serious and are in public interest.
Interestingly, Section 7 has never been invoked in independent India. And it was not because everything has been hunky dory over the past seven decades.
The government invoking Section 7 would essentially result in the central bank losing its autonomy temporarily. Even in the country’s darkest days as an economy, say in 1991 or in the period that followed the 2008 financial crisis, the government never went down that road.