"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", the law reads.
RBI deputy governor Viral Acharya, pressing for independence of the central bank, said that lack of autonomy prevents it from regulating public sector lenders, the Times of India reported.
This section, never invoked by any government so far despite phases of tension with the central bank, allows it to instruct the RBI to take specific action. First letter under Section 7 followed Allahabad court's verdict in RBI versus Power companies.
Earlier, finance minister Arun Jaitley had accused the central bank of sleeping on the job for its failure to check indiscriminate lending by public sector banks between 2008 and 2014.
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Rajya Sabha MP Subramanian Swamy showed his support for Patel and tweeted: "If RBI governor resigns then it is a direct effect of FM blaming him publicly yesterday for NPAs". The following development surfaces soon after there were reports of a rift between the RBI Governor and the government.
Adding another layer to this conflict, RBI board member S Gurumurthy wrote a letter to Urjit Patel complaining about Viral Acharya's speech. "This is equally true of all other regulators", the finance ministry said in a statement.
The letter, according to Firstpost, wanted RBI to carve out exemption for power companies under 12 February circular.
"Extensive consultations on several issues take place between the government and the RBI from time to time". Regardless of the speculations in media, there are reasons to believe that government is very unlikely to go for the extreme step of invoking Section 7, which would add to its headaches in the financial markets. Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs. The government, through these consultations, places its assessment on issues and suggests possible solutions.
The Finance Ministry on Wednesday issued a statement that said the central bank's autonomy is "an essential and accepted governance requirement". "But it is quite worrisome to see the government trying to continuously interfere into the RBI's operations". 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.