Economy

Modi Government Invokes Never-Used Powers to Direct RBI Governor: Reports

While it's unclear if only consultations have been initiated, with no specific directions issued just yet, this move further deepens the rift between the central bank and the Centre.

New Delhi: The Narendra Modi government has invoked never-before-used powers under the Reserve Bank of India (RBI) Act which allow it to issue directions to the central bank governor on matters of public interest, at least two business publications reported on Wednesday.

According to reports published in the Economic Times and BloombergQuint, a number of letters have been sent to Reserve Bank of India (RBI) governor Urjit Patel in recent weeks, exercising powers under Section 7 of the RBI Act on issues ranging from liquidity for non-banking financial companies, capital requirement for weak banks and lending to small and medium enterprises.

These letters, sources say, were likely the trigger behind RBI deputy governor Viral Acharya’s speech last Friday in which he flagged risks to central bank independence.

One report indicates that consultations between the Centre and the RBI have been initiated under  Section 7 , but that no specific directions have been given yet.

Section 7 gives the Indian government wide-ranging powers to give directions to the RBI in public interest. Because of its broad nature, it has never been used by any government in the past, which is why there is a certain amount of confusion how the process may proceed. 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.

As The Wire reported in September 2018, the Allahabad high court, which was hearing petitions filed by power companies against the central bank’s stricter NPA (non-performing asset) norms, had asked the Centre to examine the possibility of advising the RBI under Section 7. Or in other words, the court pointed out that it could be used to force central bank to dilute its stricter bad loan rules for the power sector.

At the time, most legal experts believed that it was unlikely the Modi government would issue directions under the rarely-used provision. Anonymously-sourced media reports also indicated that the finance minister would not go through with the step. When asked, economic affairs Subhash Chandra Garg said that a high-level committee would decide whether they would go that route to provide relief to stressed power projects.

The letters issued over the last few weeks though appear to be on other subjects: the relaxation of rules under the prompt corrective action (PCA) framework, liquidity in the NBFC  (non-banking finance company) space and bad loan recognition norms for small and medium businesses.

Both these subjects have proven to be contentious issues in recent RBI board meetings, with non-official directors like S. Gurumurthy in particularly forcefully arguing for them. The Economic Times also reported on Wednesday that Gurumurthy had written a letter to Patel this week complaining about the nature of Viral Acharya’s speech last Friday.

In remarks made to the publication, the co-convenor of the right-wing Swadeshi Jagran Manch said that he had objected to “Acharya going public on issues not discussed in or disclosed to the board which met just two days earlier”.

Reacting to the reports, former finance minister P. Chidambaram tweeted that if the government had “issued unprecedented directions”, then there would be “more bad news today”.

The Ministry of Finance issued a statement in which it said the autonomy of RBI is “essential and accepted” and that governments have “nurtured” this. “Both the Government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. For the purpose, extensive consultations on several issues take place between the Government and the RBI from time to time. This is equally true of all other regulators. Government of India 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,” the statement reads.

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