Government Says "Extensive Consultations With RBI" Amid Row Over Autonomy

Urjit Patel governor of the Reserve Bank of India at the spring meetings of the International Monetary Fund and World Bank in Washington D.C

"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", Chidambaram added.

"You see (between) 2008 to 2014, after the global economic crisis, to keep the economy artificially going, banks were told open your doors and lend indiscriminately", Jaitley said at India Leadership Summit organised by US-India Strategic Partnership Forum.

"Both the Government and Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy".

The government action, thought within its constitutional remit, could end up hurting latter's credibility among investors, fear economists. Martin Redrado, the central banker, chose to go because the Argentine political leadership ordered the bank to transfer its reserve into the government's kitty. In lending cases, government stand is contradictory. India's present situation is complicated by developments in the financial sector as a stressed banking sector and credit squeeze for NBFCs threaten to soften credit growth. Following the recent collapse of IL&FS, non-banking financial companies are facing credit squeeze. His remark only inflamed the ongoing row between the RBI and the government.

It further claimed that the government has invoked never used before Section 7 of the RBI act.

Earlier, a letter by the All India Reserve Bank Association had said that the deputy governor, Viral Acharya, spoken more "in disgust and despondency" due to continuous nibbling by the government and the finance ministry.

Another government-affiliated economist that The Wire spoke to said, on condition of anonymity, that the RBI should follow a middle path rather than completely close itself to consultations with the government. The stand-off is unfortunate. "Also, RBI is an independent body, so if Patel resigns, it will be a big negative for the markets", said independent market expert Ambareesh Baliga. In response, RBI Governor Urijit Patel had blamed regulatory constraints as the RBI's powers to regulate public sector banks is limited.

The government added that it would continue to carry out extensive consultations with the central bank to give its assessments on issues and suggest possible solutions.

Sources within the government and the RBI said that, over the last few months, the two sides had held discussions on various issues, including easing of norms under the prompt corrective action framework for weaker banks. But the specific warning within it goes beyond any current conditions and applies to any discussion about power struggles between governments and their central banks.

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, and so on.

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