New Delhi: After an escalation of the stand-off between the Centre and the RBI in last one week, the finance ministry on Wednesday said it respects the autonomy of the central bank, within the framework of the RBI Act. This is seen by many as a softening of the government’s stand.
“The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this,” said a statement by the finance ministry.
The statement — which was seen by many as a softening of the government’s stand — comes after reports suggested that the finance ministry has invoked Section 7(1) of the RBI Act for its consultations with the RBI.
The Section 7(1) gives the North Block power to issue any direction to the RBI governor on matters of public interest.
The purported letters sent by finance ministry reportedly deals with the relaxation in lending restrictions on some banks by removing them from Prompt Corrective Action and easing NPA norms for power firms.
There is a speculation that the straw that broke the camel’s back was the government’s attempts to dip into RBI’s reserves.
The difference between the finance ministry and RBI exist on a number of issues including capital norms, independent payments regulator, NBFC liquidity, oversight of PSBs and NPA recognition rules among others.
If the government issues directions under this section, it would be the first-ever in the 83-year-long history of the RBI.
On Wednesday morning, speculations were rife that RBI governor Urjit Patel would resign if he was forced by the government to follow its orders by invoking Section 7 (1), which will undermine the RBI autonomy. However, the RBI governor has reportedly convened a board meeting on November 19 to discuss contentious issues raised by the government, indicating that he may not be resigning.
“If indeed government has issued directives to the RBI, then its governor should resign forthwith,” said former finance minister Yashwant Sinha.
Later in the evening, Arun Jaitley said that communication between the government and central bank have not ever been disclosed. This suggests that the government felt that the RBI was to be blamed for worsening of relations between the two.
“The government of India has never made public the subject matter of those consultations. Only the final decisions taken are communicated,” said the statement.
It said that government, through these consultations, places its assessment on issues and suggests possible solutions.
“The government will continue to do so,” it added.
The finance ministry statement said 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.
Another former finance minister P. Chidambaram wonder as to what forced the government to take such a desperate step.
“We did not invoke section 7 in 1991 or 1997 or 2008 or 2013. What is the need to invoke the provision now? It shows that government is hiding facts about the economy and is desperate,” said P. Chidambaram.
The tension escalated after RBI deputy governor Viral Acharya last week warned that undermining a RBI’s independence could be “potentially catastrophic.”
