Government cites never-used powers for resolving issues with RBI

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Finance ministry and RBI are said to have differed on the central bank's handling of weak public sector banks, tight liquidity in the market and ways of resolving bad loans in the power sector. While refusing to divulge the contents of the letter, Gurumurthy told The Economic Times that he had objected to "Acharya going public on issues not discussed in or disclosed to the board which met just two days earlier". "We firmly hold that undermining the central bank is a recipe for disaster and the government must desist", the All India Reserve Bank Employees Association said in a letter.

The government wants the RBI to dilute PCA guidelines so that these banks could lend to NBFCs.

The government has been trying to railroad the RBI and the monetary policy committee into accepting its diktats. "Governments in India have nurtured and respected this", the ministry stated in a press note. "For the goal, extensive consultations on several issues take place between the Government and the RBI from time to time", it added.

"This complex interplay of the sovereign's exercise of its powers, the central banker's exit, and the market's revolt, will be at the center of my remarks today on why it is important for a well-functioning economy to have an independent central bank, i.e., a central bank that is independent from the executive branch of the government".

The government statement comes after reports that it has invoked never-before-used powers under Section 7 of the RBI Act that empowers the government to consult and give instructions to the central bank governor to act on certain issues that the government considers serious and in public interest. The statement issued by the union said, the hiatus has widened now and the deputy governor has spoken more "in disgust and despondency" due to continuous nibbling by the government and the finance ministry.

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"The government of India has never made public the subject matter of those consultations".

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. While the Economic Affairs Secretary declined to comment on whether Section 7 had been invoked, the official statement also made no mention of it.

The government has cited the never-before-used power of issuing directions to RBI Governor to seek a resolution to differences with the central bank, sources with knowledge of the development said.

If the move was indeed true, it showed that the government was "desperate" and was hiding facts about the economy, he said adding the previous UPA government did not invoke Section 7 prior to liberalisation of the economy in 1991, the Asian financial crisis of 1997 or the period after the recession in 2008. What is the need to invoke the provision now? "The government will continue to do so", it added.

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