The Divide Gets Deeper: Government May Invoke Unprecedented Section 7 Of RBI Act

The Divide Gets Deeper: Government May Invoke Unprecedented Section 7 Of RBI ActThe Reserve Bank of India (RBI). (Satish Bate/Hindustan Times via Getty Images)

The tensions between the government and India’s central bank, the Reserve Bank of India (RBI), may be reaching alarming levels with Economic Times reporting that the government, in a bid to protect the interests of the country, has invoked Section 7 of the RBI Act, 1934.

According to the section, “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.” This piece of legislation provides for the formation and functioning of RBI and also sets up the framework for functioning of banks in India.

According to the report, the government had sent directives under the section to RBI on specific issues like liquidity for NBFCs, capital requirement for weak banks and lending to SMEs, issues that have been at the heart of recent disagreements between the two. Though the government and the RBI have not agreed on many points in the past, relations took an unprecedented downturn when RBI’s deputy governor Viral Acharya made strong remarks against the government on 27 October.

As reported earlier, RBI governor, Urjit Patel may resign on account of widening trust deficit between the government and the central bank. In response to such reports circulating in the media, both rupee and bond prices have witnessed a decline.