Govt vs RBI: Section 7 sword still hangs over RBI

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New Delhi | Updated: December 13, 2018 6:41:54 AM

The fear of binding directives to the Reserve Bank of India (RBI) to follow the government’s diktat on vexed issues under the powerful Section 7 of the RBI Act hasn’t yet dissipated, despite the resignation of Urjit Patel and the appointment of Shaktikanta Das as the new central bank governor.

rbi, shaktikana dasConsultations with the RBI, using the powerful but never-used section, were sought on all those issues on which both the finance ministry and the central bank had not just held discussions but also exchanged fairly comprehensive communications.

The fear of binding directives to the Reserve Bank of India (RBI) to follow the government’s diktat on vexed issues under the powerful Section 7 of the RBI Act hasn’t yet dissipated, despite the resignation of Urjit Patel and the appointment of Shaktikanta Das as the new central bank governor. The finance ministry is learnt to be in no rush yet to convey its disinclination to issue any directive under Section 7, invoking which it had sought consultations with the RBI earlier this year in an unprecedented move.

This section gives the government the power to seek mandatory consultations with the central bank on any issue and, if necessary in public interest, give binding orders.

Interestingly, the consultations with the RBI, using the powerful but never-used section, were sought on all those issues on which both the finance ministry and the central bank had not just held discussions but also exchanged fairly comprehensive communications, a source told FE.

This meant, said the source, the government wanted not just consultations but also the power to issue directives to the RBI at some point should the central bank continue to stick to its contrarian, “rigid stance”.

The issues on which consultations were sought included the prompt corrective action (PCA) framework for stressed banks, liquidity crunch, capital adequacy norms for banks, economic capital framework that governs RBI’s surplus transfer to the government and credit to micro, small and medium enterprises, sources had earlier said. In its reply, the RBI had stuck to its stance, without promising the changes the government might have wanted. The central bank has been resisting the ministry’s pressure to tweak the “stringent” PCA framework and lower capital adequacy requirement for banks. It also feels the liquidity crunch is not a systemic issue, given that growth in credit to NBFCs has been high (55.6% as on October 26 from a year before, against a 13.4% rise in overall non-food credit) and there was no case for extra surplus transfer to the government.

Late last month, economic affairs secretary Subhash Chandra Garg had told FE that the next meeting of the RBI board would discuss the regulator’s governance structure. While the government was committed to the RBI’s autonomy, he said, there was a need to ensure the central bank was more consultative and responsive in the manner other regulators were. Asked if the government would issue directions under the Section 7 if the (then) RBI governor Patel didn’t agree to the proposals on governance reform, Garg was cryptic in his reply: “This is not a threat; it is rather a legal position. I don’t see any necessity (of issuing directions).”

Also read: Central bank autonomy “sacred”, says Arvind Subramanian

In his maiden media briefing after taking over as the RBI governor, Das said the next meeting of the RBI’s central board will be held on Friday, as scheduled. He promised to hold consultations with stakeholders, wherever required, while pledging to uphold the RBI’s institutional autonomy and integrity.

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