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

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

The currency fell as much as 0.5 percent to 74.0575 per dollar on Wednesday, after the Economic Times reported that the government invoked a rarely-used power to direct the central bank on matters of public interest. What's interesting is that the following Section of the RBI Act has never been used by any government post the independence of India. While the Economic Affairs Secretary declined to comment on whether Section 7 had been invoked, the official statement also made no mention of it.

Voicing support for Patel, Bharatiya Janata Party (BJP) leader and Rajya Sabha MP Subramanian Swamy on Wednesday said if the governor decides to leave, the blame would fall on Jaitley.

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

The finance ministry said consultations with RBI took place from time to time "in public interest". The letter wanted RBI to carve out exemption for power companies under 12 February circular. Regardless of the speculations in media, there are reasons to believe that government is very unlikely to go for the extreme step of invoking Section 7, which would add to its headaches in the financial markets. Asking the government to stop arm-twisting the central bank, the letter said both should talk and sort out the issues, instead of trying to ride roughshod over RBI and warned that "what they (government) are trying is at the expense of the nation".

Prompt corrective action (PCA): 11 public and 1 private bank in the country have been placed under what is called a PCA framework - rules the RBI puts in place for weaker banks - which bars lending by these banks, among other things, until they strengthen their capital base.

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Earlier, a letter by the All India Reserve Bank Association had said that the deputy governor, Viral Acharya, spoken more "in disgust and despondency" due to continuous nibbling by the government and the finance ministry. The government, through these consultations, places its assessment on issues and suggests possible solutions.

Former Finance Minister P Chidambaram tweeted, "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".

"The markets have taken these developments in their stride as there is an inherent belief that the central bank is independent and will continue with its rules-based mandate, whilst the government focuses on reforms and looks to buoy growth, drawn also by the approaching elections".

The letter said, "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".

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