RBI Autonomy Key, But Limited by Law: Finmin

The government sought to define the nature of its relationship with the Reserve Bank of India — currently at a low ebb — by declaring that it respected the regulator’s autonomy but that this independence was subject to provisions of the RBI Act. This meant that it will continue to raise issues of public interest and the economy with the central bank, the government insisted. The statement came on the day ET reported that the government had invoked powers never used before under the RBI Act to issue directions to the central bank. The press release helped calm the market but didn’t appear to suggest a de-escalation in hostilities between the government and the central bank.

“The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement,” the government said, amid speculation about governor Urjit Patel resigning. “Governments in India have nurtured and respected this.” The government and RBI have to be guided by “public interest” and “the requirements of the Indian economy”, suggesting that regulatory autonomy cannot be at the cost of these.

‘Consultations to Continue’

“Extensive consultations on several issues take place between the government and the RBI from time to time,” the government said. “The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so,” the release said, signalling that it wouldn’t back down from bringing up what it regards as matters of concern with RBI in the future.

ET reported on October 31 that the government had relied on Section 7 (1) of the RBI Act, which gives it powers to issue any direction to the governor on matters of public interest, and sent at least three letters in the past few weeks on issues ranging from the transfer of reserves, the prompt corrective action (PCA) framework and liquidity management. These three issues are among those at the centre of the hostilities between the two sides.

Section 7 hasn’t been used before. The Allahabad High Court had in August said the government could use it to consult with Reserve Bank of India on easing bad loan norms while declining relief for stressed power companies. The letters to RBI cited above have been seen as the trigger for RBI deputy governor Viral Acharya’s hard-hitting speech on Friday in which he warned that undermining the central bank’s independence could be “potentially catastrophic”. The government also seemed to be irked about the contents of its communications with RBI becoming known.

“The government of India has never made public the subject matter of those consultations. Only the final decisions taken are communicated,” it said. Former finance minister and senior Congress leader P Chidambaram warned of “more bad news” if the government used Section 7 of the RBI Act. “If, as reported, the government has invoked Section 7 of the RBI Act and issued unprecedented ‘directions’ to RBI, I am afraid there will be more bad news today. 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 the government is hiding facts about the economy and is desperate,” he tweeted.

The Economic Times, 1st November 2018

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