While speculation abounded on Wednesday about whether the government had invoked Section 7 of the RBI Act, which would give the government the ability to direct the central bank's actions, the Finance Ministry remained studiously silent on the issue.
Last week, RBI deputy governor Viral Acharya lashed out at the Central government, saying it was trying to undermine the independence of the central bank. What's interesting is that the following Section of the RBI Act has never been used by any government post the independence of India.
In open letter, All India Reserve Bank Employees Association says govt must desist from nibbling at central bank's autonomy and let it do its job in an unfettered way, else it will incur the wrath of financial markets. Second letter, the report added, was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs.
The finance ministry said consultations with RBI took place from time to time "in public interest". Arguing against the Centre's proposal, the RBI had said, "The digital payments have made good and steady progress". 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.
Patel and his deputy governors are expected to meet top finance ministry officials on Friday. However, they added, there has been no talk of invoking Section 7 (1). In particular, the central bank is not directly subject to political time pressures and the induced neglect of the future; by virtue of being nominated rather than elected, central bankers have horizons of decision-making that tend to be longer than that of governments, spanning election cycles or war periods.
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Government officials were "very upset" with the RBI for publicly talking about a rift with the government, fearing it could tarnish the country's image among investors, Reuters reported. The news of Patel's possible resignation has sent rocked the Indian government.
There have also been media reports that the government has invoked never-before-used powers under the RBI Act that allow it to issue directions to the central bank governor on matters of public interest.
Patel had come under increasing criticism from the banking industry as well as the government over his handling of non-performing assets (NPAs) and his stance on the autonomy of the RBI.
Warning of more "bad news", former finance minister and senior Congress leader P Chidambaram said, "If, as reported, Government has invoked Section 7 of the RBI Act and issued unprecedented "directions" to the RBI, I am afraid there will be more bad news today", he said.