Amid tensions between the government and the Reserve Bank of India (RBI), the former has reportedly initiated steps towards invoking its powers under Section 7 of the RBI Act of 1934. It is a provision under which the government can give directions to the RBI to take certain actions “in the public interest”. This provision has been built into the law governing not just the RBI but also regulatory bodies in other sectors. Until now, however, the government has never exercised its powers under Section 7 of the RBI Act.
Under Section 7, “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. Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.”
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Now, the government has started the process, or the first step towards invoking those powers under Section 7 — which is to start consultations with the RBI Governor on issues such as easing the PCA framework, providing more credit to small units. The next step would be to issue a directive to the RBI if the government so chooses — something which has never been done so far in the history of the RBI.
Such moves have reportedly upset the central bank. On Friday, RBI Deputy Governor Viral Acharya had warned that “governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution”. This was during a lecture in Mumbai.
While RBI Governors had conflicts with the government earlier too, these had never reached the extent of initiating consultations under Section 7, observers have noted.
Last year, former Governor Y V Reddy had noted that the government has powers to give directions. “But, in giving directions also, unlike other statutes, consultation with the Governor is necessary in regard to the RBI before issuing the directions. Independence to the central bank is granted by the government with a specific purpose. Experience has also shown that trust and confidence will improve if the spending authority, viz., the government is separate from the money creating authority, that is, central bank or monetary authority,” Reddy had said in a speech in Chennai on February 22, 2017.