Autonomy of Reserve Bank 'essential', says finance ministry
31 October, 2018, 14:35 | Author: Kevin Carter
It had weakened as much as 74.15 after news reports suggested that the government had invoked Section 7 of the RBI Act to direct governor Urjit Patel on issues related to liquidity for non-banking finance companies, capital for weak banks, and lending to small and medium enterprises.
It further claimed that the government has invoked never used before Section 7 of the RBI act.
According to a media report, the government has invoked the never-before-used powers under the RBI Act allowing it to issue directions to the central bank governor on matters of public interest.
Patel and other regulators, including the Securities and Exchange Board of India, the Insurance Regulatory and Development Authority and the Pension Fund Regulatory and Development Authority, met Jaitley and other top finance ministry officials at a meeting of the Financial Stability and Development Council on Tuesday to discuss the liquidity crunch. His remark only inflamed the ongoing row between the RBI and the government.
"Still it does sound like the finance ministry is trying to dial down the temperature".
With the war between the Narendra Modi-led NDA government and the Reserve Bank of India (RBI) escalating, there is apprehension that the government may invoke Section 7 of the RBI Act.
Indian markets clawed back some early losses after the statement but still appeared tentative.
The 10-year benchmark bond yield was at 7.87 percent from its previous close of 7.83 percent. At 1.48 pm, the rupee pared losses to 0.38% to 73.96 a dollar.
Investors are anxious that a prolonged row between the government and the RBI could impact decision making at a time when India's financial markets have been hit hard by a series of debt defaults by one of the largest infrastructure funding companies.
"It is hard to believe that the RBI governor will resign because it is unprecedented and would look quite irresponsible and (an) immature step", said a senior trader at a foreign bank.
Acharya saved his sharpest words for the very end though, effectively telling the Government of India what is going to happen if it tries to undermine the Reserve Bank of India. I don't know what the central bank was doing.
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.
Following this, the finance minister blamed the RBI for its lending spree between 2008 and 2014 that left banks with huge debts.
Acharya's speech is, as a result, remarkable in how well it lays out exactly what seems to be happening between the Centre and the RBI right now, especially with talk of Patel considering what Redrado did: resignation.
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