RBI and Government tussle,government invokes section 7

urjit patel resigns

What is happening in the finance sector when the tussle between govt and RBI when certain TV reports claimed that RBI governor Urjit Patel might submit its resignation. The tussle grew between the North Block and the banking regulator for the first time, when the RBI published a dissent note on its website, expressing its disagreement with the government in setting up a separate payments regulator.

This all started when RBI’s deputy governor Viral Acharya last week had made a strong case for the need of autonomy at the country’s central bank — his speech had been widely shared on social media. Citing sources, Reuters reported that the government officials are very upset with the RBI for making the rift public.

Now, reports are coming up that the Modi government might invoke never used before section 7. The government has invoked never-before-used powers under the RBI Act that allow it to issue directions to the central bank governor on matters of public interest, the Economic Times newspaper reported.

The report claimed that the government had sent letters to the RBI governor in recent weeks exercising powers under section 7 of the RBI Act on issues ranging from liquidity for non-bank finance companies, capital requirements for weak banks and lending to small- and medium-sized companies.

What Section 7 says?

Section 7 says that ‘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’, a statute that has not been used in independent India, according to the Economic Times.

Deputy Governor comment-:

Earlier, pitching for “effective independence” RBI Deputy Governor Viral Acharya on Friday said governments that do not respect central bank’s independence would sooner or later incur the wrath of financial markets.

Amid instances of apparent differences between the government and the RBI, Acharya emphasised that undermining a central bank’s independence is akin to committing a “self-goal for any government.

The result was that RBI deputy governor Viral Acharya fired the first salvo, the central bank’s employees union on Monday launched an attack against the central government.

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.”

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