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The history of the contentious Section 7 in the RBI Act

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Section 7 (1) of the Reserve Bank of India Act became a contentious issue after the tension between the central bank and government turned into a public spat over the last few days. No government has so far invoked this section in the central bank’s 83-year history. According to Section 7 (1), “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.”
The issue of invoking Section 7 (1) came up during the hearing of Allahabad high court in a case filed by the Independent Power Producers Association of India challenging RBI’s 12 February circular. The high court, in August, said the government could issue directions to RBI under Section 7 of RBI Act. Against this backdrop, the government issued a letter to the RBI governor seeking his views on exemption for power companies in relation to the 12 February circular. The second instance was when the government on 10 October sought the governor’s views on using RBI’s capital reserves for providing liquidity.
The third letter pertained to regulatory issues, including withdrawal of Prompt Corrective Action for public sector banks, easing constraints on banks for loans to small and medium enterprises (SMEs). The government has only initiated consultations with RBI on different issues under Section 7 (1) and not invoked it. According to Volume 1 of the History Of The Reserve Bank Of India (1935-1951), the clause relating to directions by the central government was drafted by RBI after combining the provisions of Section 4(1) of the Bank of England Act, 1946, and Section of the Commonwealth Bank of Australia Act, 1945. “The Governor considered it desirable to make it clear in the Act itself that when the Government decided to act against the advice of the Governor, they took the responsibility for the action they wished to force on the Bank, although it was hoped that occasions for the exercise of such powers will be few,” said the book.
The finance minister, however, was not in favour of the proviso as drafted by the Bank and sought re-drafting. “The clause thus provided for prior consultation with the Governor before issue of directives by the Treasury, but was silent as to the devolvement of responsibility, in the case of difference of opinion between the Treasury and the Bank. The prior consultation with the Governor would ensure that Government got the benefit of the Governor’s views on matters of importance to the country,” said the book. Later Section 7(1) of the Bank Act was amended at the time of nationalization in 1949, to empower the Centre to issue directions to central bank in public interest, according to Volume II of History Of RBI.

The Mint, 1st November 2018

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