Modi Government Invokes Never-Used Powers to Direct RBI Governor

Urjit Patel governor of the Reserve Bank of India at the spring meetings of the International Monetary Fund and World Bank in Washington D.C

Yet, with elections looming later this year and next, Prime Minister Narendra Modi's government is keen to ensure lenders extend credit as rising oil prices and a currency slump hurt Asia's third-largest economy. Reports add that the Central government has invoked some powers mentioned under the RBI Act in order to issue directions to the RBI Governor Urijit Patel.

The Centre has invoked Section 7 of the BI Act that empowers it to give instructions to the RBI Governor in order to act on certain issues.

As per the Section 7 of the RBI Act, the Central Government is entitled to give directions to the Central Bank after it consults the RBI Governor. Chidambaram reiterated that the 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. "It might be better if the time-honored practice of the finance minister and the governor of the RBI meeting often in private and talking issues".

The letters are the latest flare-up in a dispute between the central bank and the government. Government officials had recently called for the RBI to relax lending restrictions on some banks. In his speech, Acharya defended the central bank's independence, saying its autonomy would be strengthened by having regulatory control over state-run banks.

At the time, most legal experts believed that it was unlikely the Modi government would issue directions under the rarely-used provision. Senior officials said the government fears the rift could tarnish the country's image among investors. Experts and observers noted that before Patel, others, including Raghuram Rajan, Arvind Panagaria and Viral Acharya pointed at serious problems with the way this government approached economic policies and implementation. The directions reportedly come on the matters related to the public.

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As the row RBI-vs-government spat intensifies, the Centre will soon issue a statement on the issue, sources told Moneycontrol.

Government officials believe that RBI Governor Urjit Patel has some responsibility for the controversy, and he can not expect an extension of his current three-year term - which ends next September - "as his right", one of the officials added. The gains were largely a result of a separate announcement by the RBI about an injection of liquidity through government bond buying.

Acharya's speech comes after a long-running tug of war between the government and the RBI over whether the central bank should part with some of its Rs 3.6 lakh crore ($48.93 billion) reserves to fund the country's fiscal deficit.

Relations between the government and the RBI have gone downhill over the past few months, with the government unhappy with the central bank's interest rate policy, and its decision to invoke the "prompt corrective action" framework that restricts lending by NPA-hobbled banks, among others. "It was not expected from the RBI", the official added.

Voicing support for Patel, Bharatiya Janata Party (BJP) leader and Rajya Sabha MP Subramanian Swamy on Wednesday said if the governor decides to leave, the blame would fall on Jaitley. Anonymously-sourced media reports indictated also that the finance minister would not go through the step.

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