Govt Sends Letters to RBI Invoking Section 7 of RBI Act

Govt Sends Letters to RBI Invoking Section 7 of RBI Act: Reports

However, there was no sign of resignation by Patel at the meeting, officials said.

"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".

The media reports also said the government had invoked never-before-used powers to issue directions to the central bank governor on matters of public interest.

The government action, thought within its constitutional remit, could end up hurting latter's credibility among investors, fear economists. During his speech, he said in terms of decision-making, the government's horizon was that a T20 cricket match, while that of the RBI's was a test match. That has led to a liquidity crunch in the entire non-banking finance sector. Martin Redrado, the central banker, made a decision to go because the Argentine political leadership ordered the bank to transfer its reserve into the government's kitty.

The Confederation of Indian Industry (CII) on Wednesday said that the financial sector is going through a phase of stress and put out a detailed paper with ten recommendations including seeking intervention from the banking regulator, Reserve Bank of India.

The government statement on Wednesday although seemed like an attempt to douse the flames of disagreement between itself and RBI that pretty much happened due to its own doing. It first tried to nudge the RBI towards easing PCA norms.

This section has never been invoked in the history of independent India despite numerous clashes between the government and the RBI over the years.

Urjit Patel is expected to meet top finance ministry officials on Friday.

Another government-affiliated economist that The Wire spoke to said, on condition of anonymity, that the RBI should follow a middle path rather than completely close itself to consultations with the government. "They kept pushing the truth below the carpet", he said. The stand-off is unfortunate. "It has to curb its anger and disappointment", the economist added.

In his notes to the Murli Manohar Joshi-headed Lok Saba's committee on estimates, Rajan had red-flagged Mudra and Kisan credit card loans as risky and potential sources of NPAs.

As per a report by Economic times, in recent weeks, separate letters have been sent to RBI Governor Urijit Patel.

"A tug-of-war between the central bank and government has occurred in the past, with exchanges usually heating up in a tough economic environment". But the specific warning within it goes beyond any current conditions and applies to any discussion about power struggles between governments and their central banks.

The government has been trying to railroad the RBI and the monetary policy committee into accepting its diktats. Unsurprisingly, central banks strive to build credibility through a series of hard choices that reflect sacrificing short-term gains for long-term outcomes such as price or financial stability.

For example, the finance ministry had sough a meeting with MPC members in June past year, just a day before the RBI's bi-monthly credit policy review meet. With the two giants managing the Indian economy - the Central government and the Reserve Bank of India - at loggerheads with each other, it is the economy that is under stress.

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