After what seemed like a mounting struggle between the Reserve Bank of Indi
a (RBI) and the government, the latter traced its steps back in the later part of the day on October 31 and issued a statement, assuring the central bank that its autonomy is an essential and accepted governance requirement and governments in India have nurtured and respected this.
According to a person familiar with the development, it is unlikely that the Section 7 of the Reserve Bank of India Act, which was being used as a threat to get the RBI
to the negotiation table on a host of issues, will be invoked.
‘Public interest comes first’
“Both government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators,” the finance ministry stated in the statement.
The ministry also said that the government has never made public the subject matter of those consultations. “Only the final decisions taken are communicated. The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so,” it added.
What is Section 7?
Under Section 7 of the RBI Act of 1934, “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 section has never been invoked since the time India gained independence, even though the government, at various points in time, has been at loggerheads with the central bank.
At the heart of the matter
Differences between the government and the RBI have peaked this year because of the latter’s reluctance to fall in line on a host of issues, as demanded by the Centre. The two have been sparring over the RBI’s handling of the Nirav Modi crisis and the bank’s refusal to relax norms on bringing weak banks under prompt corrective action. The latest reason for the escalation is the liquidity crisis being faced by NBFCs. While NBFCs have approached the government complaining of a liquidity crunch and are seeking a bailout from the Centre, the RBI is of the opinion that there is no liquidity issue.