RBI deputy governor Viral V Acharya in a speech on Friday had stated that undermining the Central bank's independence could be "potentially catastrophic". If it's actually invoked, it could undermine the RBI's autonomy and RBI Governor Urjit Patel reportedly may step down. Citing sources, Reuters reported that the government officials are very upset with the RBI for making the rift public. Sentiments are already weak in the market.
Adding to the row, Finance Minister Arun Jaitley blamed the central bank for failing to stop a lending spree during 2008-2014 that left banks with $150 billion of bad debt. The Economic Affairs Secretary on Wednesday, however, refused to comment anything with respect to it.
It reads: "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".
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RBI and the government have reportedly been at the loggerheads over several issues including the government demanding ease in lending rules for at least 11 banks under prompt corrective action (PCA) framework, while the regulator thinks otherwise.
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. The statement issued by the union said, the hiatus has widened now and the deputy governor has spoken more "in disgust and despondency" due to continuous nibbling by the government and the finance ministry.
Relaxation of lending norms: Non-official directors of the central banking institution have been demanding a slackening "MSME forbearance" (micro, small and medium enterprises). Delivering the AD Shroff Memorial Lecture, Acharya had called for greater powers for RBI to regulate public sector banks as it seeks to clean up the banking system. What's interesting is that the following Section of the RBI Act has never been used by any government post the independence of India. "Only the final decisions taken are communicated", the statement said. "There have been talks with the RBI on these issues, but invoking Section 7 (1) is something that has not come up yet but we need to also ensure that industries are not killed", he added. "It shows that the government is hiding facts about the economy and is desperate", he said in a tweet. "But it is quite worrisome to see the government trying to continuously interfere into the RBI's operations". The speech was taken as a symptom of the fight between the government and the RBI.