Rupee Drops on Speculation of Worsening RBI-Government Tension

Sean Reid
October 31, 2018

(1) 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 meeting assumes significance for various reasons, including the perceived liquidity shortage being felt by NBFCs as also because it was the first time the RBI Governor met Mr. Jaitley following RBI Deputy Governor Viral Acharya's comments on Friday about how the government was undermining RBI's autonomy. The finance ministry could not be immediately reached for comment.

Central banks around the world are facing heat from political leaders. Delivering the AD Shroff memorial lecture on Saturday, Acharya said governments that did not respect their central banks' independence would sooner or later incur the wrath of financial markets.

The counsel representing RBI had said that Section 7 of the RBI Act "embodies and puts in place a forum for resolution of all questions and is in one sense the repository mechanism for dealing with issues which constitute a "conflict zone". The letter invoking Section 7 was sent to the RBI last week, sources confirmed to India Today TV.

The government has invoked Section 7 of the Reserve Bank of India (RBI) Act.

The FSDC is headed by the Finance Minister and comprises the RBI Governor, the SEBI Chairman, and heads of regulators such as PFRDA, IRDAI and the Chairman of the Insolvency and Bankruptcy Board. But at the same time, there is an unmistakable sense of displeasure and warning from the government when it says that it frequently consults with RBI on important matters but never goes public with these matters. But in 2016, the central bank conducted a special asset quality review of all banks that determined there were $150 billion of non-performing loans, forcing the RBI to impose lending restrictions on some.

Reserve Bank of India Governor Urjit Patel may consider resigning from his post given a breakdown in relations with the government, TV channels reported on Wednesday, sparking a sell-off in the rupee and bonds. Arguing against the Centre's proposal, the RBI had said, "The digital payments have made good and steady progress. And that's why, when several regulators publish their approach papers or tentative drafts, they hold hearings, meet individuals, meet groups of stakeholders together and improve upon what is being said".

This temporarily takes away the RBI's independence and autonomy.

Finance Minister Arun Jaitley, meanwhile, has blamed the RBI's inability in identifying the problem of NPAs in Indian banks and lack of timely measures for the current crisis-like situation in the banking sector.

Another government official told Reuters that it was vital that what happened between the government and RBI was kept confidential.

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