Finance Ministry: RBI autonomy is ‘essential, accepted governance requirement’

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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New Delhi: The government has come out with a clarification on the purported spat with the Reserve Bank of India. As expected, the government has rightly chosen not to escalate the matters further.

A statement from the government clarifying on the issue clearly acknowledges the need for RBI autonomy within the framework of RBI Act, by calling it is essential and accepted in an economy.

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.

The government added that it has never made public the subject matter of those consultations and has only communicated the final decision.

This is a clear message to the RBI, particularly in the backdrop of deputy governor, Viral Acharya’s public outburst on RBI autonomy, that don’t go to public on differences with the government. The truce from the government has come. This, indeed, will be welcomed by the financial markets. But, the public dissent is out in the open now.

The government has invoked Section 7 of the Reserve Bank of India (RBI) Act. The letter invoking Section 7 was sent to the RBI last week, sources confirmed.

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.

“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,” Section 7(1) of the RBI Act reads.

The section has never been invoked before in the history of independent India.

Former Union finance minister and senior Congress leader P Chidambaram Wednesday warned of “more bad news” if reports stating that the government has invoked Section 7 of the Reserve Bank of India Act were true.

He added that it showed that the government was ‘desperate’ and was hiding facts about the economy.

Chidambaram reiterated that the 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.

Section 7 of the RBI Act, 1934 allows the government to issue directions to the RBI, after consultation with the Governor of the bank, on issues of public interest.

In a speech last week, RBI Deputy Governor Viral Acharya warned that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite the economic fire, and come to rue the day they undermined an important regulatory institution.”