RBI autonomy essential, says finance ministry amid rift with central bank

RBI autonomy essential, says finance ministry amid rift with central bank

According to a media report, the government has invoked the never-before-used powers under the RBI Act allowing it to issue directions to the central bank governor on matters of public interest.

The development comes amid a widening rift between the Modi government and Patel after the central bank's Deputy Governor Viral V Acharya in a speech on Friday, 26 October, warned that undermining autonomy and independence of RBI could be "potentially catastrophic".

Following this, the finance minister blamed the RBI for its lending spree between 2008 and 2014 that left banks with huge debts. For the goal, extensive consultations on several issues take place between the government and the RBI from time to time. The following development surfaced a few days after the RBI deputy governor Viral Acharya, during a public address, said that the interference by the Centre in the working of the RBI could result in disastrous consequences.

Mumbai: The rupee pared losses against the U.S. dollar on Wednesday after the government said that it respects the Reserve Bank of India's autonomy.

Issuing a statement, the Finance Ministry said, "The autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement".

"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", Section 7 of the RBI Act reads. That has led to a liquidity crunch in the entire non-banking finance sector.

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It further claimed that the government has invoked never used before Section 7 of the RBI act. In contrast, a central bank plays a test match, trying to win each session but, importantly, also survive it so as to have a chance to win the next session, Acharya had said.

The issue of Section 7 first came up during an Allahabad High Court hearing on a case filed by Independent Power Producers challenging an RBI circular issued on 12 February.

The ministry also said in the statement that the government has never made public the subject matter of those consultations and only the final decisions taken are communicated. Former Finance Minister Yashwant Sinha tweeted, "If indeed govt has issued directives to the RBI then its governor should resign forthwith". What is the need to invoke the provision now?

"If, as reported, government has invoked Section 7 of the RBI Act and issued unprecedented "directions" to the RBI, I am afraid there will be more bad news today", Chidambaram added.

The government issued the statement to address the perception of growing differences between the finance ministry and the country's central bank. The RBI declined to comment.

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