Thursday, Mar 28, 2024 | Last Update : 06:14 PM IST

  India   All India  01 Nov 2018  Finance Ministry ‘softens’ line as row with RBI escalates

Finance Ministry ‘softens’ line as row with RBI escalates

THE ASIAN AGE.
Published : Nov 1, 2018, 1:01 am IST
Updated : Nov 1, 2018, 1:01 am IST

“If indeed the government has issued directives to the RBI, then its governor should resign forthwith,” said former finance minister Yashwant Sinha.

The finance ministry statement said both the government and the central bank, in their functioning, have to be guided by the public interest and the requirements of the Indian economy.
 The finance ministry statement said both the government and the central bank, in their functioning, have to be guided by the public interest and the requirements of the Indian economy.

New Delhi: Amid the escalation of the standoff between the Central government and the Reserve Bank over the past week, the finance ministry on Wednesday assured that the government respects the central bank’s autonomy within the framework of the RBI Act. This is being seen as a softening of the government’s stand.

“The autonomy of the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Govern-ments in India have nurtured and respected this,” said a finance ministry statement.

Relations between the Centre and the RBI appeared to worsen after reports that the finance ministry sent three letters under Section 7(1) of the RBI Act for consultations that gives North Block the power to issue any direction to the RBI governor on matters of public interest. These letters deals with the relaxation in lending restrictions on some banks by removing them from Prompt Corrective Action (PCA) and easing NPA norms for power companies. This will be the first time that the government will be using this provision in the 84-year history of the RBI.

In the morning there was speculation that RBI governor Urjit Patel may resign if he was forced by the Centre to follow its orders by evoking Section 7(1), which will undermine his autonomy. However, the RBI governor  has reportedly called a board meeting on November 19 to discuss contentious issues raised by the government, indicating that he may not be resigning, at least not immediately.

“If indeed the government has issued directives to the RBI, then its governor should resign forthwith,” said former finance minister Yashwant Sinha.

In the evening, finance minister Arun Jaitley said that communications between the government and the central bank have never been disclosed. This showed that the government felt the RBI was to blame for the worsening of relations between Mint Street and North Block.

The finance ministry statement said both the government and the central bank, in their functioning, have to be guided by the public interest and the requirements of the Indian economy. For this purpose, it said, extensive consultations on several issues take place between the government and the RBI from time to time. This, the finance ministry noted, is equally true of all regulators.

“The Government of India has never made public the subject matter of those consultations. Only the final decisions taken are communicated,” said the statement. It said the government, through these consultations, places its assessment on issues and suggests possible solutions. “The government will continue to do so,” it added.

Tensions between the finance ministry and Mint Street escalated after RBI deputy governor Viral Acharya had warned in a speech last week that undermining a central bank’s independence could be “potentially catastrophic”. The finance ministry is upset with the central bank for publicly talking about a rift with the government. In his speech, Mr Acharya cited the Argentine government’s meddling in its central bank’s affairs in 2010 as an example of what can go wrong. “Governments that do not respect the central bank’s independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” Mr Acharya said.

The differences between the finance ministry and the RBI emerged over a number of issues, including capital norms, independent payments regulator, NBFC liquidity, oversight of PSU banks and NPA recognition rules, among other matters.

“We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013. What is the need to invoke the provision now? It shows that the government is hiding facts about the economy and is desperate,” said former finance minister P. Chidambaram.

Tags: reserve bank, finance ministry
Location: India, Delhi, New Delhi