Modi Government Invokes Never-Used Powers to Direct RBI Governor

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The clarification comes amid reports said that the government has invoked Section 7 of the RBI Act that empowers the government to consult and direct the RBI to act on issues that it considers necessary in public interest.

The government has invoked never-before-used powers under the RBI Act that allow it to issue directions to the central bank governor on matters of public interest, the Economic Times newspaper reported.

Although the government has issued a press statement on Wednesday afternoon in a bid to clarify controversy surrounding invocation of section 7, sources said the tussle has been going on for quite some time and it all started with "forced demonetisation" by the government in 2016. However, simmering tensions came to a head on October 26, when RBI Deputy Governor Viral Acharya, speaking at the A D Shroff Memorial Lecture in Mumbai, made a scathing statement against the government.

Top sources indicated that the Central government played hardball and made things hard for the Central bank. Martin Redrado, the central banker, chose to go because the Argentine political leadership ordered the bank to transfer its reserve into the government's kitty. The deputy governor even helpfully used a cricketing analogy to simplify the reasons that central banks and governments will always have different outlooks.

Voicing support for Patel, Bharatiya Janata Party (BJP) leader and Rajya Sabha MP Subramanian Swamy on Wednesday said if the governor decides to leave, the blame would fall on Jaitley. This myopia or short-termism of governments is best summarized in history by Louis XV when he proclaimed "Apres moi, le deluge!"

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The government in a released statement said, "Autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement". During his speech, he said in terms of decision-making, the government's horizon was that a T20 cricket match, while that of the RBI's was a test match.

As mentioned in the report, Acharya's speech was only a strike in the long-running tug of war between the government and the RBI on whether the bank should part with some of its Rs 3.6 lakh crore reserves to fund the country's fiscal deficit.

As this dynamic plays out, markets watch keenly, and if uncertainty grows and confidence in central bank independence and credibility erode, then markets rap bond yields and exchange rate on the knuckles! And the most contentious issue of this fight is the reference to Section 7 (1) of the Reserve Bank of India Act under which the government shot off at least three letters on different issues to the Central bank.

Perhaps the most contentious issue remains that of the RBI's reserves and capital on the central bank's balancesheet. "Regulators have a very important function".

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