Government Initiates Consultations With RBI Under Rare Provision

The government has issued “several” letters to the Reserve Bank of India initiating consultations under Section 7 of the RBI Act, said a person familiar with the matter.

While consultations have been initiated under this provision, no directions have been given, said this person.

Among the issues where consultations have been initiated include the prompt corrective action framework for weak banks, said the person. BloombergQuint could not ascertain the full list of issues being discussed under Section 7.

The letters were issued at least a month before Deputy Governor Viral Acharaya gave a strong speech on central bank independence, the person said.

Emails were sent to spokespersons for the RBI and the government on Wednesday morning. The story will be updated with their response. The news was first reported by the Times of India.

Section 7 of the RBI Act gives the government broad powers to give directions to the RBI in public interest.

It reads: 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.

The provision has never been used by any government in the past.

Points Of Difference

There have been a number of contentious issues that have cropped up between the RBI and the government.

Earlier this month, government officials on the RBI’s board pushed for a relaxation of the prompt corrective action framework being used to nurse weak banks back to health. This, despite the fact, that the RBI has repeatedly explained the need for such a framework. Eleven government banks are under the framework. The pressure from the government to ease the framework prompted Acharya to reiterate the need for greater RBI control over PSU banks —a point highlighted by Governor Patel earlier this year.

The government has also demanded that the RBI shell out more dividend from its reserves. Suggestions to either increase dividend or reduce the capital on the central bank’s balance sheet have met with opposition from current and former RBI officials.

Citing research from various academics and writings from former RBI Deputy Governor Rakesh Mohan, Acharya noted that having adequate reserves and capital is important for maintaining confidence in the central bank.

“Having adequate reserves to bear any losses that arise from central bank operations and having appropriate rules to allocate profits (including rules that govern the accumulation of capital and reserves) is considered an important part of central bank’s independence from the government,” Acharya said in his speech.

Other issues of dispute between the RBI and the government include a suggestion to set up a payments regulator outside the purview of the RBI. Recently, the RBI publicly disclosed its dissent note on the government’s proposal to set up a Payment Regulatory Board.

(This article was originally published on BloombergQuint)