India: Government invokes never-used powers to direct RBI governor

  • The government has invoked never-before-used powers under the RBI Act allowing it to issue directions to the central bank governor on matters of public interest, in a development that gives a new twist to the ongoing skirmish between RBI and the government.
  • ET has learnt that separate letters have been sent to the RBI governor in recent weeks — exercising powers under this section — on issues ranging from liquidity for NBFCs, capital requirement for weak banks and lending to SMEs.
  • The unprecedented move could have triggered last week’s rare public assertion of independence by RBI, with deputy governor Viral Acharya warning the Centre of disastrous consequences if the regulator’s autonomy is impinged upon.
  • Section 7 of the RBI Act empowers the government to consult and give instructions to the governor to act on certain issues that the government considers serious and in public interest.
  • This Section had never been used in independent India till now. It was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 crisis.
  • It is not yet clear how this Section operates since it has never been used till now. The aggressive move could scandalise a section of academia and experts, while raising questions about the government’s intentions and the impact on Reserve Bank of India’s autonomy.
  • Using the powers under Section 7 is considered sacrilegious among central bankers as it leaves little scope for the regulator to conduct the affairs in a way they deem fit. It would also set a precedent for future governments to push through their agenda even on minor issues, if there are differences.
  • The government and RBI have been at loggerheads over a few issues for some time now. While the government believed that easing of lending rules for the 11banks under the prompt corrective action (PCA) framework could help reduce pressure on micro, small and medium enterprises (MSMEs), the regulator stood its ground arguing that such a move would put the clock back and undo clean-up efforts.
  • A recent court order suggesting that the government consider giving directions to RBI under Section 7 of RBI Act in a case involving independent power producers may have opened up the avenue for the Centre.
  • Power companies had contested a 12 Feb 18 circular by the banking regulator that said if a borrower misses payment even for a day, it would be considered a defaulter even though the account will remain standard in the books of the bank.

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