New Delhi: The government is unlikely to invoke Section 7 of the Reserve Bank of India Act though 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, said a person familiar with the development.
New Delhi: The government is unlikely to invoke Section 7 of the Reserve Bank of India Act though 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, said a person familiar with the development.
The finance ministry in a statement said that the autonomy for the central bank within the framework of the RBI Act, is an essential and accepted governance requirement and governments in India have nurtured and respected this.
“Both government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators,” the finance ministry stated.
The statement said the government has never made public the subject matter of those consultations. “Only the final decisions taken are communicated. The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so,” it added.
Under Section 7 of the RBI Act of 1934, “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”.
This section has never been invoked in the history of independent India despite numerous clashes between the government and the RBI over the years.
Though differences between the government and RBI have peaked this year over a number of issues, including the central bank’s handling of the Nirav Modi crisis and the latter’s firm stand on bringing weak banks under prompt corrective action, the latest reason for the escalation is the liquidity crisis being faced by NBFCs. While NBFCs have approached the government complaining of a liquidity crunch and are seeking government support, the central bank is of the view that there is no liquidity problem.
Both the central bank and the government sparred on this in Tuesday’s Financial Stability and Development Council meeting as well.
The finance ministry in a statement said that the autonomy for the central bank within the framework of the RBI Act, is an essential and accepted governance requirement and governments in India have nurtured and respected this.
“Both government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators,” the finance ministry stated.
The statement said the government has never made public the subject matter of those consultations. “Only the final decisions taken are communicated. The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so,” it added.
Under Section 7 of the RBI Act of 1934, “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”.
This section has never been invoked in the history of independent India despite numerous clashes between the government and the RBI over the years.
Though differences between the government and RBI have peaked this year over a number of issues, including the central bank’s handling of the Nirav Modi crisis and the latter’s firm stand on bringing weak banks under prompt corrective action, the latest reason for the escalation is the liquidity crisis being faced by NBFCs. While NBFCs have approached the government complaining of a liquidity crunch and are seeking government support, the central bank is of the view that there is no liquidity problem.
Both the central bank and the government sparred on this in Tuesday’s Financial Stability and Development Council meeting as well.