India's finance minister Arun Jaitley criticised the Reserve Bank of India (RBI) for failing to prevent lending excess in a speech on Tuesday. Multiple media reports on Wednesday said the government has invoked Section 7 of the RBI Act, a law allows it to issue directions to the RBI Governor in matters adhering to public interest. Or in other words, the court pointed out that it could be used to force central bank to dilute its stricter bad loan rules for the power sector.
Asked why all four Deputy Governors had come for the FSDC meeting, which is normally attended by one DG, a senior government official said that since the meeting had a long agenda covering various aspects, "it was proper for all four to come". The RBI has put lending curbs on some weak state-run banks, while the government - facing an election early next year - wants to ensure banks continue to lend to boost economic growth.
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. According to ET Now, Patel had told government not to "raid RBI reserves", as government was keen on the transfer of reserves to fill up its fiscal deficit amid NPA stress.
At the time, most legal experts believed that it was unlikely the Modi government would issue directions under the rarely-used provision.
The Asian Age said in an editorial that 'it seems like the government would like to use the RBI as its piggy-bank to be broken when required.
Acharya had three of his fellow deputy governors in the audience and also thanked Governor Patel for his "suggestion to explore this theme for a speech", in a show of unity from an institution typically known for its restraint.More news: Suspected hoax targeting Special Counsel Robert Mueller referred to FBI for investigation
Voicing support for Patel, Bharatiya Janata Party (BJP) leader and Rajya Sabha MP Subramanian Swamy on Wednesday said if the governor decides to leave, the blame would fall on Jaitley. The official said Patel may face a tough time when he appears before a parliamentary standing committee on November 12.
Dr. Acharya's comments sparked off speculation on relations between the RBI and the Centre, with several former officials of both saying that communication between the two had completely broken down.
The 10-year benchmark bond yield rose to 7.87 per cent from its previous close of 7.83 per cent.
"The central bank looked the other way (when) there was indiscriminate lending".
Government officials believe that RBI Governor Urjit Patel has some responsibility for the controversy, and he can not expect an extension of his current three-year term - which ends next September - "as his right", one of the officials added.
"When we are facing problems on the external front like high crude oil prices, trade tensions putting pressure on our current account balance, can we afford another domestic crisis?" the third government source said.