Reason for reports of Reserve Bank of India Governor Urjit Patel pondering over submitting his resignation is due to fact , the government’s attempts to invoke a rare provision of the RBI Act, 1934, is said to be the trigger behind the move.
Section 7 gives power to the government to instruct the RBI governor to act on issues of public interest. The provisions of this Act has never been used since the formation of the central bank 83 years ago.
“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,” reads the Section in the Act.
The Section, hence, will lead to undermining of the autonomy of the institution. Sources in the RBI hint at the government mentioning Section 7 in recent communications with the bank.
It is learnt that the latest outburst by Deputy Governor Viral Acharya in a public lecture is also the outcome of the government’s intention to invoke Section 7.
He spoke about the independence of central bank by giving the example of Argentina, whose central bank governor resigned stating that the bank’s independence was being undermined.
“I will also try to lay out why the risks of undermining the central bank’s independence are potentially catastrophic, a “self-goal” of sorts, as it can trigger a crisis of confidence in capital markets that are tapped by governments (and others in the economy) to run their finances,” Acharya told in the lecture.
The government has rued the RBI decision on imposing lending restrictions on weak public sector banks, saying it has stifled the MSME sector and economy. Apart from this, the government has a different view on power sector loan and prompt corrective action (PCA).
To invoke the Section, the government has to inform the governor about initiating the process under the Act and need to invite the bank’s views to try and convince the RBI. Reports are emerging that the government has already initiated consultation with RBI to invoke Section 7.
Senior Congress leader and Former Union finance minister P Chidambaram said that the governments he was a part of in the past had never used Section 7 of the Reserve Bank of India Act of 1934, under which a direct order can be issued by the government to the central bank to carry out its wishes in “public interest”.
“If, as reported, Government has invoked Section 7 of the RBI Act and issued unprecedented ‘directions’ to the RBI, I am afraid there will be more bad news today.
“We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013. What is the need to invoke the provision now? It shows that government is hiding facts about the economy and is desperate (sic),” Chidambaram said in a series of tweets.
