RBI firm despite govt. seeking consultation under Section 7

Patel may quit if the section is invoked

Reserve Bank of India Governor Urjit Patel.

The Reserve Bank of India (RBI) has refused to provide any leeway to stressed borrowers or give in to the demand of higher dividend by the government, which issued three letters to the central bank in the last one month for consultation under Section 7 of the RBI Act.

Section 7 of the RBI Act empowers the central government to issue directions to the RBI in public interest. This section has, however, never been invoked by the government so far.

Section 7 has two parts — consultation and then issuing a direction to the RBI for taking some action in public interest.

According to central banking sources, one letter pertained to exemption for power companies from new stressed asset norms, while another one was to dilute capital threshold norms of the prompt corrective action framework. Yet another one communication was pertaining to more capital to the government from the reserves of the central bank.

‘No directions issued’

Sources said while the communication from the government was for consultation under Section 7, no directions were issued.

It was speculated that if the government issued directions under this Section, RBI Governor Urjit Patel would quit.

“RBI has responded to all the communications that were sent by the government. RBI has decided to maintain its stance,” said a central banking source close to the development.

Amid all these, the board meeting of the RBI on October 23 turned out to be a stormy one, going on for eight hours without arriving at any conclusion on the three contentious issues of regulatory forbearance, PCA and higher capital. All eyes are now on the next board meeting scheduled on November 19, in which the unresolved issues could be discussed.

Within a few days of the board meeting, RBI deputy governor Viral Acharya, in a speech, highlighted differences between the RBI and the government and claimed that the latter was impinging on RBI’s autonomy, which would have unsavoury consequences on the economy.

As the spat between the central bank and the government came out in public, the finance ministry issued a statement emphasising on RBI’s autonomy, but added that it would continue consultations. “The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Government of India has nurtured and respected this,” the finance ministry said in a statement.