Question of autonomy — As the Indian government tries to strong arm the country’s central bank, its governor threatens to resign

• The Indian government is mulling over invoking Section 7 of the Reserve Bank of India (RBI) Act, a provision which allows the central government to issue directives to the bank regulator.
  
  
• The government has sent three letters to Reserve Bank of India under Section 7 (1) to seek consultation over various issues like the economy’s liquidity crunch and weak banks.
  
  
• The bank’s governor, Urjit Patel, has threatened to resign if the government does not back down.
  

The Indian government and the country’s apex bank, the Reserve Bank of India (RBI), are locking horns over the latter’s autonomy. While the RBI believes it should continue to make decisions on its own, the government of India believes that it should have some say in how they’re handling the economy — by invoking Section 7 of the RBI Act.

By putting that section in play, the government can issue orders to the central bank, which it will then have to follow — regardless of whether not it believes the move is correct.

The central government has already started using Section 7(1) of the RBI Act. In fact, it sent three letters to RBI seeking consultation. These letters include directives on how to ease the norms for prompt corrective action (PCA) and address the liquidity crunch that non-banking financial companies (NBFCs) are facing.

In response to these injunctions, RBI’s governor, Urjit Patel, has threatened to resign. The Ministry of Finance, though unwilling to share details in the public domain, has stated that they are officially consulting with the RBI on how to proceed with Section 7.

The Government in a Statement states that the autonomy for the Central Bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this.

— Ministry of Finance (@FinMinIndia) October 31, 2018

What’s the big deal about Section 7?

In the 71 years of its independence, this the first time that any government in power will be using the provision. Never before has the government questioned or attempted to correct the issues of the money by strong arming the country’s apex money regulator.

The section gives exclusive rights to the central government to direct RBI, which in any other case, does not take direction from any governing body in India.

Even during the crisis of 1992 when liberalisation-privatisation-globalisation (LPG) was implemented or, the more recent, global recession of 2008, the government did not feel the need to invoke Section 7 of the RBI Act.

The RBI and the Indian government have been muscling with each other due to opposing points of view over ‘prompt corrective action’ (PCA). While Indian government wanted RBI to relax the lending rules for banks issue loans so that it would reduce pressure on the Ministry of Micro, Small and Medium Enterprises (MSMEs), the RBI did not agree.