India: Govt refuses to yield on Section 7 of RBI Act

  • The Union government will not yield ground on its right to issue a directive to the Reserve Bank of India (RBI), even as it claimed that contentious issues between the two should be resolved at the board meeting of the central bank on 19 Nov 18.
  • “There is complete clarity in the government that it has the right to issue a directive. This clause exists for all Acts defining the role of the regulator,” a person familiar with the development said, asking not to be identified.
  • Specifically, Section 7 (1) of the Reserve Bank of India Act, 1934, says that the Union government can “from time to time give such directions to the (central) bank as it may, after consultation with the governor of the bank, considered necessary in the public interest”. Further, Section 7 (2) gives the government powers to entrust the business of RBI to its central board of directors.
  • The person cited above also said that dialogue between the finance ministry and RBI was ongoing even though the two sides continued to disagree publicly. Referring to speculation that RBI governor Urjit Patel had threatened to resign, the person said it was inexplicable as nothing so inclement had transpired.
  • On 9 Nov 18, economic affairs secretary Subhash Chandra Garg said the government and RBI were in talks to finalize the economic capital framework of the central bank, which would lead to a transfer of surplus reserves with the central bank to the government.

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