Autonomy of RBI essential, nurtured by govt: Finance Ministry

31 October, 2018, 14:34 | Author: Sally Reid
  • Govt Sends Letters to RBI Invoking Section 7 of RBI Act: Reports

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.

Government official were very upset by Acharya's comments, which included a reference to problems created in Argentina when its government meddled in central bank affairs, Reuters reported. Sentiments are already weak in the market.

On Tuesday, Finance Minister Arun Jaitley retaliated by alleging that the central bank looked the other way when indiscriminate lending happened between 2008 and 2014 leading to the bad loans crisis.

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.

Although the government in a bid to bring down the mounting tensions issued a statement saying that government has "nurtured and respected" autonomy of the Central bank and has been holding extensive consultations with it on many issues, the anxiety in the air was palpable.

The ongoing spat between the government and the Reserve Bank of India (RBI), if not contained, will have dire consequences on the markets, feel Dalal Street experts.

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Reserve Bank of India Deputy Governor Viral Acharya's speech last week was seen by many as a clear indication of the friction between the government and the central bank, which has now properly spilled over into the public domain.

"The statement is ambiguous and does not fully clarify the issues at hand", said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai. Delivering the AD Shroff Memorial Lecture, Acharya had called for greater powers for RBI to regulate public sector banks as it seeks to clean up the banking system.

"Government of India has never made public the subject matter of those consultations".

It further claimed that the government has invoked never used before Section 7 of the RBI act.

In a statement issued hours later through the finance ministry, the government said the RBI's independence was "an essential and accepted governance requirement". "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. "It shows that government is hiding facts about the economy and is desperate".

Among other recommendations CII has suggested that RBI must encourage non banking finance companies (NBFCs) to securitize their assets which can be purchased by banks.

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