Published: Wed, October 31, 2018
Money | By Hannah Jacobs

Autonomy of Reserve Bank 'essential', says finance ministry

Autonomy of Reserve Bank 'essential', says finance ministry

The rift between India's central bank and the government has widened and could lead to the Reserve Bank of India (RBI) governor considering resignation, CNBC TV18 reported on Wednesday, citing sources.

"The autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement".

Reserve Bank of India Governor Urjit Patel may consider resigning from his post given a breakdown in relations with the government, TV channels reported on Wednesday, sparking a sell-off in the rupee and bonds.


Last week, RBI deputy governor Viral Acharya lashed out at the Central government, saying it was trying to undermine the independence of the central bank. "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. While the Economic Affairs Secretary declined to comment on whether Section 7 had been invoked, the official statement also made no mention of it. The letter wanted RBI to carve out exemption for power companies under 12 February circular. But at the same time, there is an unmistakable sense of displeasure and warning from the government when it says that it frequently consults with RBI on important matters but never goes public with these matters.

BJP slammed Rahul Gandhi for his criticism against Prime Minister Narendra Modi over the RBI-Centre rift, and said that it reflects Congress party's grounding, "which is fast eroding in national politics".

Government officials believe that RBI Governor Urjit Patel has some responsibility for the controversy, and he can not expect an extension of his current three-year term - which ends next September - "as his right", one of the officials added.


According to Livemint, the government is unlikely to invoke Section 7 of the Reserve Bank of India Act though it is using it as a threat to get the central bank to the negotiating table on a host of issues, including the more recent liquidity crisis that has impacted non-banking finance companies. However, they added, there has been no talk of invoking Section 7 (1).

Rajya Sabha MP Subramanian Swamy showed his support for Patel and tweeted: "If RBI governor resigns then it is a direct outcome of FM blaming him publicly yesterday for NPAs". In particular, the central bank is not directly subject to political time pressures and the induced neglect of the future; by virtue of being nominated rather than elected, central bankers have horizons of decision-making that tend to be longer than that of governments, spanning election cycles or war periods.

Section 7 of the RBI Act empowers the government to issue directions necessary for public interest to the RBI from time to time after consultation with the RBI governor.


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