Published: Wed, October 31, 2018
Finance | By Jaime Brady

RBI's autonomy an 'essential and accepted' governance requirement: Finance Ministry

RBI's autonomy an 'essential and accepted' governance requirement: Finance Ministry

According to reports, sources said that Letters of Consultation under Section 7 of the RBI Act were invoked 3 times. Both the Government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.

The statement further stated that, "Government of India has never made public the subject matter of those consultations".

Rajya Sabha MP Subramanian Swamy showed his support for Patel and tweeted: "If RBI governor resigns then it is a direct outcome of FM blaming him publicly yesterday for NPAs". Former Finance Minister Yashwant Sinha tweeted, "If indeed govt has issued directives to the RBI then its governor should resign forthwith". "For the goal, extensive consultations on several issues take place between the Government and the RBI from time to time", it added.

The letter, according to Firstpost, wanted RBI to carve out exemption for power companies under 12 February circular.

India's highest-circulation English-language paper, the Times of India, wrote in an editorial that curbing the RBI's autonomy or removing RBI Governor Urjit Patel would trigger a mass exodus of investors and 'the government must not contemplate it even in its dreams'. "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. Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs.

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From the tone of Acharya's speech, it appeared that the RBI is under tremendous pressure to hand over its surpluses squirrelled away over years and hence its decision to take the issue to the people.

Though differences between the government and RBI have peaked this year over a number of issues, including the central bank's handling of the Nirav Modi crisis and the latter's firm stand on bringing weak banks under prompt corrective action, the latest reason for the escalation is the liquidity crisis being faced by NBFCs. However, two letters were sent to RBI last month in which "Section 7 was quoted", highlighting the existence of powers under the Act that allows the government to issue directions to the central bank on "matters of public interest".

"Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution", he said.

"The markets have taken these developments in their stride as there is an inherent belief that the central bank is independent and will continue with its rules-based mandate, whilst the government focuses on reforms and looks to buoy growth, drawn also by the approaching elections".

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