Friday, 16 November, 2018

Urjit Patel may resign as Jaitley’s remarks widen RBI-govt rift

Open rift between RBI Modi govt as official warns of catastrophe Govt Sends Letters to RBI Invoking Section 7 of RBI Act: Reports
Cristina Norman | 31 October, 2018, 10:48

(1) 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.

There has been an irreversible breakdown between the RBI Governor Urjit Patel and the government, the media said, adding that all options were on the table. On Friday night, the RBI Deputy Governor Viral Acharya warned that undermining a central bank's independence could be "potentially catastrophic", in an indication that it is pushing back hard against government pressure to relax its policies and reduce its powers.

Following the public rift, the government has reportedly invoked Section 7 of the RBI Act, which has never been used in independent India.

It said the government had sent letters to the RBI governor in recent weeks exercising powers under section 7 of the RBI Act on issues ranging from liquidity for non-bank finance companies, capital requirements for weak banks and lending to small- and medium-sized companies.

Subhash Chandra Garg, the secretary of the Department of Economic Affairs in the Ministry of Finance, refused to comment on the reports. Reserve Bank case emphasising that "the Reserve Bank, apart from it being a reasonable body, is answerable to the Central Government, and the public opinion is certainly strong and vocal enough for it to heed". A statement from the government clarifying on the issue clearly acknowledges the need for RBI autonomy within the framework of RBI Act, by calling it is essential and accepted in an economy.

The dispute between RBI and the government has been simmering for a few months now. Arguing against the Centre's proposal, the RBI had said, "The digital payments have made good and steady progress".

Financial markets have not reacted to the rift, but investors and traders are wary, as they want to see policymakers working closely together to stabilise India's fragile banking system and roiled markets. But in 2016, the central bank conducted a special asset quality review of all banks that determined there were $150 billion of non-performing loans, forcing the RBI to impose lending restrictions on some.

Yet, Jaitley was publicly critical of the RBI on Tuesday, saying the central bank's lax policies had contributed to banks' current woes. "Regulators ultimately decide the rules of the game and regulators have to have a third-eye which is to be perpetually be open", Arun Jaitley had said in February. "And that's why, when several regulators publish their approach papers or tentative drafts, they hold hearings, meet individuals, meet groups of stakeholders together and improve upon what is being said".

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