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Autonomy of Reserve Bank 'essential', says finance ministry amid rift with central bank

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New Delhi, Oct 31: Amid reports of rift between the Centre and the Reserve Bank of India, the finance ministry on Wednesday said that the government respects the autonomy of the Reserve Bank of India amid reports of differences with the central bank.

Arun Jaitley

"The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Government of India has nurtured and respected this," said the statement.

RBI vs Govt: Arun Jaitley meets Urjit Patel as rift widens

"Both government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators," the finance ministry stated.

The statement however did not mention of the government citing the never-before-used power of issuing directions to RBI Governor to seek a resolution to differences with the central bank.

Jaitley criticises RBI for indiscriminate lending by banks

The government has sent at least three letters on different issues under Section 7 (1) of the Reserve Bank of India Act that gives it powers to issue any direction to the central bank governor on matters of public interest.

Reports, however, insisted that the government has not taken any action of issuing any specific direction and has only initiated consultations with the central bank on unresolved issues.

Finance Ministry and RBI are said to have differed on the central bank's handling of weak public sector banks, tight liquidity in the market and ways of resolving bad loans in the power sector.

It is reported that the finance ministry wrote three separate letters in the past few weeks to RBI on issues ranging from Prompt Corrective Action (PCA) framework to liquidity management and sought consultation under Section 7 of the RBI Act.

Section 7 of the RBI Act empowers the government to issue directions to the central bank, after consultation with RBI Governor, on issues that it considers serious and of public interest. This section has never been invoked before.

Former Finance Minister and senior Congress leader P Chidambaram warned of "more bad news" if indeed the government were to invoke Section 7 of the RBI Act. If the move was indeed true, it showed that the government was 'desperate' and was hiding facts about the economy, he said adding the previous UPA government did not invoke Section 7 prior to liberalisation of the economy in 1991, the Asian financial crisis of 1997 or the period after the recession in 2008.

"If, as reported, the 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. We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013. What is the need to invoke the provision now? It shows that the government is hiding facts about the economy and is desperate," he tweeted.

Reports said never in the history of RBI has a direction under Section 7 of RBI Act been issued to the central bank. The letters seeking consultation under Section 7 apparently prompted RBI Deputy Governor Viral Acharya's hard-hitting speech on Friday, in which he warned that toying with the central bank's independence could lead to dire consequences.

He had warned that undermining RBI's independence could be "potentially catastrophic", indicating the central bank is being pushed to relax its policies and reduce its powers ahead of a general election due by May.

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