It appears that the ongoing turf war between the Indian government and the central bank over issues of regulation and credit flow has come to a head, with the governor of the Reserve Bank of India, Urjit Patel, threatening to resign.
Patel has reportedly offered to resign if the government invokes Section 7 of the RBI Act, reports ET Now TV channel. Section 7 empowers the government to instruct the RBI governor to act on issues the government considers serious and in the public’s interest.
However, the Economic Times had reported that the government has already invoked this section and sent letters to the RBI governor recently on issues ranging from liquidity for Non-Banking Financial Companies (NBFCs), capital requirements for struggling banks and lending to small and medium-sized enterprises (SMEs).
The government, backed by non-official directors on the central bank’s board for micro, small and medium enterprises, including Swaminathan Gurumurthy, are interested in invoking the special provision as far as SMEs are concerned. The RBI contends, however, that any relaxation of its rules would undermine efforts to improve the health of the banking sector.
The unprecedented move could have triggered last week’s warning by RBI deputy governor Viral Acharya that the government’s interference in the autonomy of the central bank would have disastrous consequences.
Finance Minister Arun Jaitley on Tuesday launched a counterattack by criticizing the RBI for “looking the other way” from 2008-14, during the previous United Progressive Alliance regime, when “banks were asked to lend recklessly.”
Meanwhile, the markets are watching these developments with considerable anxiety.
Section 7 has never been used in independent India. It was not used even during the infamous balance of payments crisis in 1991 when the country had to pledge gold reserves, take a loan from the International Monetary Fund and carry out other structural adjustments.