Thursday, 15 November, 2018

RBI governor may consider resigning after rift with govt

Economy       Section 7 of RBI Act — Modi govt’s ‘secret weapon’ against the central bank
       
       	        Mahua Venkatesh         31 October 2018 Economy Section 7 of RBI Act — Modi govt’s ‘secret weapon’ against the central bank Mahua Venkatesh 31 October 2018
Elsie Buchanan | 31 October, 2018, 10:48

It, however, underlined that both the government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.

There is an "irreversible breakdown between RBI governor and the government", one of the source added.

Representatives at the Reserve Bank weren't immediately available for comment.

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.

According to The Economic Times however, Section 7 of the Reserve Bank of India Act may already have been invoked and could be the reason between a rift that has become increasingly public in recent days.

CNBC-TV18 has reached out to the RBI and the Prime Minister's Office, and their comments are awaited.

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"The political dysfunction is yet further excuse for foreigners to head for the hills, sustaining pressure on INR", said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. "If the Reserve Bank were to act mala fide, the Central Government and in the last resort, the Courts, will be there to intervene".

The dispute between RBI and the government has been simmering for a few months now.

The council discussed at length the issue of real interest rate, current liquidity situation, including segmental liquidity position in NBFCs and the mutual fund space, an official statement said.

Financial markets have not reacted to the rift, but investors and traders are wary, as they want to see policymakers working closely together to stabilise India's fragile banking system and roiled markets. Delivering the AD Shroff memorial lecture on Saturday, Acharya said governments that did not respect their central banks' independence would sooner or later incur the wrath of financial markets.

Prompt corrective action (PCA): 11 public and 1 private bank in the country have been placed under what is called a PCA framework - rules the RBI puts in place for weaker banks - which bars lending by these banks, among other things, until they strengthen their capital base. But in 2016, the central bank conducted a special asset quality review of all banks that determined there were $150 billion of non-performing loans, forcing the RBI to impose lending restrictions on some. The Centre, in an indirect attack, said that it was worrisome that no red flags were caught. The report, which has not received any by official confirmation, said that the government is keen on a bureaucrat as the next governor if Patel resigns.

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