Friday, 16 November, 2018

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

So far this year the rupee has declined over 13% against the US dollar So far this year the rupee has declined over 13% against the US dollar
Orlando Vargas | 31 October, 2018, 10:49

With the war between the Narendra Modi-led NDA government and the Reserve Bank of India (RBI) escalating, there is apprehension that the government may invoke Section 7 of the RBI Act.

This did not go down well with the Centre, who said that they were 'upset' that the RBI publicly spoke about the rift. "Even the RBI board is being sought to be stuffed in a particular direction, which would prompt the discerning people to look askance and make it hard for RBI to frame policies", the union said in the letter.

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".

The section has never been invoked before in the history of independent India.

The government will also soon issue a statement after media reports that the government had invoked Section 7 of the RBI Act.

Central banks around the world are facing heat from political leaders.

Section 7 of the RBI Act empowers the government to consult and instruct the central bank governor on matters it considers to be serious or of public interest. "The Government will continue to do so", the Finance Ministry stated.

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The counsel representing RBI had said that Section 7 of the RBI Act "embodies and puts in place a forum for resolution of all questions and is in one sense the repository mechanism for dealing with issues which constitute a "conflict zone".

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'.

Can the government issue directions to the RBI on regulatory and policy matters? Arguing against the Centre's proposal, the RBI had said, "The digital payments have made good and steady progress". Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs.

The letters are the latest flare-up in a dispute between the central bank and the government.

Former Finance Minister P Chidambaram wrote on Twitter that if the reports were true, "I am afraid there will be more bad news today". The report, which has not received any by official confirmation, said that the government is keen on a bureaucrat as the next governor if Patel resigns.

This temporarily takes away the RBI's independence and autonomy. According to ET Now, Patel had told government not to "raid RBI reserves", as government was keen on the transfer of reserves to fill up its fiscal deficit amid NPA stress.

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