Finance Ministry declares truce, but signals displeasure at RBI's behaviour

Finance Ministry declares truce, but signals displeasure at RBI's behaviour

In his speech, he warned that undermining the central bank's independence could be "potentially catastrophic".

This was on the day Patel and other regulators, including the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority, met Jaitley and other top finance ministry officials at a meeting of the Financial Stability and Development Council on Tuesday to discuss the liquidity crunch.

Prompt corrective action (PCA): 11 public and 1 private bank in the country have been placed under what is called a PCA framework - rules the RBI puts in place for weaker banks - which bars lending by these banks, among other things, until they strengthen their capital base.

The statement said the government has never made public the subject matter of those consultations.

"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", the law reads.

The latest development follows a Friday speech by Deputy Governor Viral Acharya warning of the risks of political leaders encroaching on the central bank's independence.

The ministry said that both the government and the RBI "have to be guided by public interest and the requirements of the Indian economy".




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". Following this, the finance minister blamed the RBI for its lending spree between 2008 and 2014 that left banks with huge debts.

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

Adding another layer to this conflict, RBI board member S Gurumurthy wrote a letter to Urjit Patel complaining about Viral Acharya's speech. Regardless of the speculations in media, there are reasons to believe that government is very unlikely to go for the extreme step of invoking Section 7, which would add to its headaches in the financial markets.

The ongoing tussle between the Reserve Bank of India and the Modi Government took a new turn with several TV reports claiming that the RBI governor Urjit Patel might submit his resignation.

What does Section 7 states? The government, through these consultations, places its assessment on issues and suggests possible solutions.

They said the RBI should not air confidential matters in public and expressed fears it could tarnish India's image among investors. "We appeal to all right-minded people and experts to speak out and persuade the government to amend, and let RBI do its jobs in an unfettered was as per statutes, mandates, practices".

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