Modi Government Said To Cite Never-Used Powers In Talks With RBI

Gladys Abbott
October 31, 2018

The Section 7 of the RBI Act reads: "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".

In such a situation, the law adds, the general supervision and "direction of affairs and business of the bank will be entrusted to a central board of directors which may exercise all powers and do all acts and things which may be exercised or done by the bank". During the hearing, the government had remained silent on whether it wants to invoke Section 7 of the RBI Act to issue directions to the regulator or not.

According to reports, sources said that Letters of Consultation under Section 7 of the RBI Act were invoked 3 times. Reserve Bank case emphasising that "the Reserve Bank, apart from it being a reasonable body, is answerable to the Central Government, and the public opinion is certainly strong and vocal enough for it to heed".

According to latest reports, Ministry of Finance released a statement which said, "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 government, through these consultations, places its assessment on issues and suggests possible solutions.

BJP slammed Rahul Gandhi for his criticism against Prime Minister Narendra Modi over the RBI-Centre rift, and said that it reflects Congress party's grounding, "which is fast eroding in national politics".

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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'.

Yet, Jaitley was publicly critical of the RBI on Tuesday, saying the central bank's lax policies had contributed to banks' current woes.

The meeting assumes significance for various reasons, including the perceived liquidity shortage being felt by NBFCs as also because it was the first time the RBI Governor met Mr. Jaitley following RBI Deputy Governor Viral Acharya's comments on Friday about how the government was undermining RBI's autonomy. Government officials had recently called for the RBI to relax lending restrictions on some banks.

What does Section 7 of the RBI Act say? In response, RBI Governor Urijit Patel had blamed regulatory constraints as the RBI's powers to regulate public sector banks is limited.

Another government official told Reuters that it was vital that what happened between the government and RBI was kept confidential.

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