This Article is From Oct 31, 2018

"Consultations With RBI In Public Interest": Government Amid Autonomy Row

Reports this morning quoted sources as saying that the government had sent letters to the RBI governor in recent weeks exercising powers under section 7 of the RBI Act

The finance ministry said consultations with RBI took place from time to time "in public interest".


  • RBI autonomy an essential, accepted governance requirement: government
  • Government statement seen to confirm it has begun talks on Section 7
  • Section 7 says government can give directions to RBI in "public interest"
New Delhi: The government today said "extensive consultations" with the Reserve Bank of India (RBI) were in "public interest", after reports said it has started discussions on Section 7 of the RBI Act, a never-before-used rule that allows the centre to give instructions to the central bank's chief. In a statement, the finance ministry said such consultations with the RBI took place from time to time as both sides "have to be guided by public interest and the requirements of the Indian economy."

Here is your 10-point cheatsheet on this big story:

  1. The finance ministry statement responded to reports that it had sent letters to RBI governor Urjit Patel in recent weeks, exercising powers under Section 7 on issues ranging from liquidity for non-bank finance companies, capital requirements for weak banks and lending to small- and medium-sized companies. 

  2. Section 7 says "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". 

  3. Never used before in independent India, the law empowers the government to consult and give instructions to the RBI governor in the name of public good. 

  4. TV channels reported that RBI Governor Urjit Patel may consider resigning if the government did use its powers to control his decisions and encroach upon the central bank's domain. 

  5. It was the letters that were reportedly the provocation behind Deputy Governor Viral Acharya's hard-hitting speech at an event on Friday, in which he warned that toying with the central bank's independence could be "potentially catastrophic".

  6. "Governments that do not respect central bank 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," Viral Acharya had said in the speech that was widely circulated online.

  7. Finance Minister Arun Jaitley later said the RBI "was looking the other way" while banks were lending indiscriminately.

  8. Stating that consultations were held with all regulators, the ministry said: "the government has never made public the subject matter of those consultations. Only the final decisions taken are communicated....The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so."

  9. In an attempt to tackle criticism that it is stepping on toes, the government tempered its note saying autonomy for the RBI, "within the framework of the RBI Act, is an essential and accepted governance requirement."

  10. The government's letters to RBI are the latest in a dispute over autonomy. The RBI under Urjit Patel has been pushing for more powers to clean up a banking system saddled with bad debts. The RBI has put lending curbs on some weak state-run banks, while the government, facing the 2019 national election, wants to ensure banks continue to lend to boost economic growth.