Govt Sends Letters to RBI Invoking Section 7 of RBI Act

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According to the 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', a statute that has not been used in independent India. What's interesting is that the following Section of the RBI Act has never been used by any government post the independence of India.

Facing criticism for invoking a hitherto unused section to issue instructions to the RBI, the government on Wednesday said that it respected the autonomy of the central bank but within the framework of the RBI Act.

The former finance minister also attacked the government after it issued a statement to clarify things that are going on between itself and the RBI.

"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".

Indian markets clawed back some early losses after the statement but still appeared tentative.

The 10-year benchmark bond yield rose to 7.87 per cent from its previous close of 7.83 per cent. At 1.48 pm, the rupee pared losses to 0.38% to 73.96 a dollar. "Despite the pain, the regulators are likely to display tough love in the regulatory space to strengthen the financial system", said Radhika Rao, economist at DBS Bank.

The rift between the RBI and the Modi government turned ugly after Patel's deputy, Viral Acharya, said last week that attempts to undermine the central bank's autonomy could prove be 'potentially catastrophic'.

There is an "irreversible breakdown between RBI governor and the government", one of the source added.

"If RBI's top brass exits, there is a likelihood of instability that will be perceived, and that can have an impact on the economy and the market at large". The All India Reserve Bank Employees Association backing Viral, said, "undermining the country's central bank was a recipe for disaster which the government must desist". In contrast, a central bank plays a test match, trying to win each session but, importantly, also survive it so as to have a chance to win the next session, Acharya had said.

The rift between RBI and the Centre came into highlight after RBI published a dissent note on its website, expressing its disagreement with the government in setting up a separate payments regulator.

In his strongest criticism of RBI yet, Finance Minister Arun Jaitley on Tuesday had hit out at the central bank for failing to check indiscriminate lending during 2008 and 2014 that has led to the present bad loan or NPA crisis in the banking industry. TV channels said Patel has called for a full RBI board meeting on November 19.