Govt may have invoked never-used powers in talks with RBI Governor

Arun Jaitley

RBI and the government have reportedly been at the loggerheads over several issues including the government demanding ease in lending rules for at least 11 banks under prompt corrective action (PCA) framework, while the regulator thinks otherwise.

Finance Minister Arun Jaitley and Reserve Bank of India Governor Urjit Patel on Tuesday met face-to-face - at the Financial Stability and Development Council (FSDC) meeting - for the first time after the tension between the government and the central bank became public.

The Centre has invoked Section 7 of the BI Act that empowers it to give instructions to the RBI Governor in order to act on certain issues.

Section 7 says that "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, according to the Economic Times.

A long-simmering feud came to a head last week after scathing remarks against the Centre from RBI Deputy Governor Viral Acharya.

In a speech to top industrialists Acharya cited the Argentine government's meddling in its central bank's affairs in 2010 as an example of what can go wrong.

"The central bank looked the other way (when) there was indiscriminate lending".

A second official, based in Indian Prime Minister Narendra Modi's office, said it was "very unfortunate" that the RBI took the matters public.

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Sources present at the meeting said that Dr. Patel said the liquidity scenario among NBFCs was not as severe as it was being made out to be, but also assured the government that the RBI would ensure adequate liquidity in the system.

Another government official told Reuters that it was vital that what happened between the government and RBI was kept confidential.

At the time, most legal experts believed that it was unlikely the Modi government would issue directions under the rarely-used provision.

Patel had come under increasing criticism from the banking industry as well as the government over his handling of non-performing assets (NPAs) and his stance on the autonomy of the RBI. Experts and observers noted that before Patel, others, including Raghuram Rajan, Arvind Panagaria and Viral Acharya pointed at serious problems with the way this government approached economic policies and implementation. The report, which has not received any by official confirmation, said that the government is keen on a bureaucrat as the next governor if Patel resigns.

The official in the prime minister's office said Patel could face a tough time when he appears before a parliamentary standing committee on November 12.

The RBI and the finance ministry declined to comment. "It shows that government is hiding facts about the economy and is desperate".

Even thought the controversy around spat between the government and the RBI has been doing rounds for a couple of days now, speculations over RBI governor Urjit Patel's resignations hit the headlines on Wednesday morning.

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