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Government interference in Reserve Bank Of India (RBI)

  • Category
    Economy
  • Published
    12th Nov, 2018

Recent public spat between RBI and central government over interference of later in policy formulation of RBI has drawn criticism. The recent impasse between RBI and the government arises from a recent ill-timed and ill-advised speech by RBI deputy governor Viral Acharya. The speech followed some unnecessarily tough posturing from the government, threatening to invoke the dreaded Section 7 of the RBI Act.

Issue

Context:

Recent public spat between RBI and central government over interference of later in policy formulation of RBI has drawn criticism. The recent impasse between RBI and the government arises from a recent ill-timed and ill-advised speech by RBI deputy governor Viral Acharya. The speech followed some unnecessarily tough posturing from the government, threatening to invoke the dreaded Section 7 of the RBI Act. 

CONTRADICTING VIEWS OF RBI AND GOVERNMENT

  1. Demonetisation:
    RBI had to take blame for demonetization chaos which caused many deaths, problems of law and order and delay in proper rolling out of newly printed currency due to mismanagement.

  2. CVC report on Nirav Modi case
    CVC report in Nirav Modi case had blamed RBI for poor auditing. CVC had already warned about the misuse of Letter Of undertaking (LoU) which was ignored by central bank.

  3. Opposition of “ Project Shashakt”
    RBI had opposed Project Shashakt which was forcibly implemented by central government later.

    Project Shashakt:

    • Project Shashakt aims to resolve the problem of stressed assets of public sector banks through resolution of bad loans, depending on their size. It includes an SME approach, a bank-led resolution approach, an asset management company (AMC)/ alternate investment fund (AIF)-led approach, an NCLT / IBC-led approach and an asset trading platform approach.
    • India’s Public Sector Undertaking (PSU) banks make up 70 per cent of the total bad loans of banking industry. 
  4. Opposition to setup payment regulator outside RBI
    • RBI had opposed government’s bid to setup an independent payment regulator outside RBI.
    • The Payment and Settlement System (PSS) Act had recommended that the payments regulator should be an independent regulator with the chairperson appointed by the government in consultation with the RBI. This had been opposed by the central bank, which wants the chairperson to be from the central bank with a casting vote.

  5. For providing liquidity through capital reserves 
    The government had sought the governor’s views on using RBI’s capital reserves for providing liquidity. This was declined by the governor.

  6. Withdrawal of prompt corrective action
    Government wanted RBI to withdraw Prompt Corrective Action for public sector banks for easing constraints on banks for loans to small and medium enterprises (SMEs). IMF has also suggested the same for revival of banking sector.

Provisions of Government’s interference in RBI’s governance:

  • According to the RBI Act’s Section 7 (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 Allahabad high court, in a judgment in August, said the government could issue directions to RBI under Section 7 of RBI Act.
  • However, the government has only initiated consultations with RBI on different issues under Section 7 (1) and not invoked it.
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