Government Tensions: Did The Finance Ministry Statement Do Enough To Calm Nerves?

Muriel Colon
October 31, 2018

For the objective, extensive consultations take place between the government and the RBI from time to time. While the Economic Affairs Secretary declined to comment on whether Section 7 had been invoked, the official statement also made no mention of it.

Also, the government has invoked never-before-used powers under the RBI Act (Section 7) allowing it to issue directions to the central bank governor on matters of public interest, the Economic Times reported on Wednesday.

Indian television channels CNBC-TV 18 and ET Now both reported earlier in the day that Patel might resign. "Governments in India have nurtured and respected this", a brief Finance ministry statement said.

"Still it does sound like the finance ministry is trying to dial down the temperature".

The Finance Ministry on Wednesday acknowledged that the autonomy of the Reserve Bank of India (RBI) is an "essential and accepted governance requirement", but it neither confirmed nor denied that it had issued directives to the bank under Section 7 of the RBI Act.

The 10-year gilt yield stood at 7.8878% against its previous close of 7.831%.

The rupee fell to 73.99 to the dollar from 73.6750 on Tuesday, after touching 74.04, its lowest since October 15. "Even the RBI board is being sought to be stuffed in a particular direction, which would prompt the discerning people to look askance and make it hard for RBI to frame policies", the union said in the letter. And the most contentious issue of this fight is the reference to Section 7 (1) of the Reserve Bank of India Act under which the government shot off at least three letters on different issues to the Central bank. I don't know what the central bank was doing. "We firmly hold that undermining the central bank is a recipe for disaster and the government must desist", the All India Reserve Bank Employees Association said in a letter.

NBFCs and Housing Finance Companies (HFCs) are suffering from asset-liability mismatches (ALM), CII noted adding that in a worst-case scenario, this could lead to a run on mutual funds and defaults in the NBFC sector.

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.

Adding to the row, Finance Minister Arun Jaitley blamed the central bank for failing to stop a lending spree during 2008-2014 that left banks with $150 billion of bad debt.

Rajya Sabha MP Subramanian Swamy showed his support for Patel and tweeted: "If RBI governor resigns then it is a direct effect of FM blaming him publicly yesterday for NPAs". TV channels said Patel has called for a full RBI board meeting on November 19.

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