The rift between India's central bank and the government has widened and could lead to the Reserve Bank of India (RBI) governor considering resignation, CNBC TV18 reported on Wednesday, citing sources.
"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", Section 7 of the RBI Act reads.
Last week, RBI deputy governor Viral Acharya lashed out at the Central government, saying it was trying to undermine the independence of the central bank.
It added that the government has "never made public the subject matter of those consultations". While the Economic Affairs Secretary declined to comment on whether Section 7 had been invoked, the official statement also made no mention of it.
Finance Minister Arun Jaitley, meanwhile, has blamed the RBI's inability in identifying the problem of NPAs in Indian banks and lack of timely measures for the current crisis-like situation in the banking sector. "For the goal of extensive consultations on several issues take place between the government and the RBI from time to time".
India's highest-circulation English-language paper, the Times of India, wrote in an editorial that curbing the RBI's autonomy or removing RBI Governor Urjit Patel would trigger a mass exodus of investors and 'the government must not contemplate it even in its dreams'.
Backing the deputy governor, AIRBEA said that "Acharya had spoken more in disgust and despondency due to continuous nibbling by the government and the ministry of finance".
The letter, according to Firstpost, wanted RBI to carve out exemption for power companies under 12 February circular. Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs. Regardless of the speculations in media, there are reasons to believe that government is very unlikely to go for the extreme step of invoking Section 7, which would add to its headaches in the financial markets.
From the tone of Acharya's speech, it appeared that the RBI is under tremendous pressure to hand over its surpluses squirrelled away over years and hence its decision to take the issue to the people.
Far-sighted government leaders may be able to reap benefits of convincing voters about the importance of investing in macro-economic stability; for instance, by claiming credit for the long-term nature of financial sector outcomes attained by allowing the central bank autonomy in decision-making and delivery of its core functions. The government, through these consultations, places its assessment on issues and suggests possible solutions. "The Government will continue to do so".
In a press statement, All India Reserve Bank's Employees Association (AIRBEA) said that "undermining the country's central bank is a recipe for disaster and the government must desist".
The letter said, "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".