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Five days after RBI Deputy Governor Viral Acharya made an explosive speech, the Finance Ministry on Wednesday broke its silence to acknowledge explicitly that the central bank’s autonomy, within the framework of the RBI Act, is an “essential and accepted” governance requirement.
Acharya had in his speech on Friday said that undermining the central bank’s independence could be “potentially catastrophic”. The controversy escalated on reports that the government had invoked Section 7 of the RBI Act to issue directions on various issue, including reviewing Prompt Corrective Action.
‘Section 7 was invoked’
A senior government official told BusinessLine: “Yes, the government has used it (Section 7), as there is a need for accountability. The RBI board will meet on November 19; it is expected that the government nominees will press for concrete resolution on contentious issues.”
Meanwhile, Finance Minister Arun Jaitley, responding to repeated questions on the controversy, maintained that communications and layers of consultations between the government and the RBI have never been disclosed. However, decisions are made public, he said, while categorically ruling out a situation of financial emergency.
“Only the most ignorant will say the world’s fastest-growing economy is in a state of financial emergency,” he said.
Earlier in the day, a Finance Ministry statement said: “Both the government and the RBI, in their functioning, have to be guided by public interest and the requirements of the Indian economy.”
Extensive consultations on several issues take place between the government and the RBI from time to time, it noted.
The government, it added, had never made public the subject matter of the consultations. Only the final decisions taken are communicated, it said. “The government, through these consultations, places its assessment on issues and suggests possible solutions. The government will continue to do so,” it said.
Section 7 of the RBI Act 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. Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.”
The RBI has been pushing for more powers to clean up the banking system. In his speech, Acharya had said the central bank’s autonomy would be strengthened by having regulatory control over state-run banks. It is also believed that the RBI is not happy with government-appointed directors pressing for easier credit access to micro, small and medium enterprises.
Meanwhile, former Finance Minister P Chidambaram tweeted that reports of the invocation of Section 7 “show that government is hiding facts about the economy.”
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