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RBI autonomy essential, says finance ministry amid rift with central bank

31 October, 2018, 12:00 | Author: Shawna Walton
  • Open rift between RBI Modi govt as official warns of catastrophe

Warning of more "bad news", former finance minister and senior Congress leader P Chidambaram said, "If, as reported, Government has invoked Section 7 of the RBI Act and issued unprecedented "directions" to the RBI, I am afraid there will be more bad news today", he said. The deputy governor even helpfully used a cricketing analogy to simplify the reasons that central banks and governments will always have different outlooks.

The ministry said that both the government and the RBI "have to be guided by public interest and the requirements of the Indian economy". "The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions", he said.

In a press statement, All India Reserve Bank's Employees Association (AIRBEA) said that "undermining the country's central bank is a recipe for disaster and the government must desist".

As per the Section 7 of the RBI Act, the Central Government is entitled to give directions to the Central Bank after it consults the RBI Governor.

Sources within the government and the RBI said that, over the last few months, the two sides had held discussions on various issues, including easing of norms under the prompt corrective action framework for weaker banks.

The Asian Age said in an editorial that 'it seems like the government would like to use the RBI as its piggy-bank to be broken when required.

Earlier, finance minister Arun Jaitley had accused the central bank of sleeping on the job for its failure to check indiscriminate lending by public sector banks between 2008 and 2014. This is equally true of all other regulators. What's interesting is that the following Section of the RBI Act has never been used by any government post the independence of India.

"Only the final decisions taken are communicated".

The rift between India's central bank and the government has widened and could lead to the Reserve Bank of India (RBI) governor considering resignation, CNBC TV18 reported on Wednesday, citing sources.

The issue of Section 7 first came up during an Allahabad High Court hearing on a case filed by Independent Power Producers challenging an RBI circular issued on 12 February. The government, through these consultations, places its assessment on issues and suggests possible solutions.

Patel and other regulators, including the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority, met Jaitley and other top finance ministry officials at a meeting of the Financial Stability and Development Council on Tuesday to discuss the liquidity crunch. "The government will continue to do so", the ministry, concluding statement said.

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