Rupee Drops on Speculation of Worsening RBI-Government Tension

Virginia Carson
October 31, 2018

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.

Reserve Bank of India Deputy Governor Viral Acharya's speech last week was seen by many as a clear indication of the friction between the government and the central bank, which has now properly spilled over into the public domain. Another report in the Times of India said the government had mentioned the rule to the RBI in consultations, without invoking it. While there are reports suggesting that the Centre has already invoked Section 7 of RBI Act, it still remains unclear on how it will be used.

Acharya's speech is, as a result, remarkable in how well it lays out exactly what seems to be happening between the Centre and the RBI right now, especially with talk of Patel considering what Redrado did: resignation.

Yet, Jaitley was publicly critical of the RBI on Tuesday, saying the central bank's lax policies had contributed to banks' current woes. "For the objective, extensive consultations on several issues take place between the Government and the RBI from time to time", it added.

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On October 27, Finance Minister Arun Jaitley said, "I think, for any regulatory mechanism, stakeholder consultation has to be of a very high quality, which will probably lead to a revisiting of traditional thoughts and opinions". The letter wanted RBI to carve out exemption for power companies under 12 February circular.

RBI Deputy Governor Acharya said that governments do not respect the independence of the RBI and that they will soon "incur the wrath of financial markets, ignite an economic fire and come to rue the day they undermined an important regulatory institution". Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs.

Former Finance Minister P Chidambaram tweeted, "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".

In such a situation, the law adds, the general supervision and "direction of affairs and business of the bank will be entrusted to a central board of directors which may exercise all powers and do all acts and things which may be exercised or done by the bank".

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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.

"Only the final decisions taken are communicated. The government will continue to do so", the ministry, concluding statement said.

The letter said, "Even the RBI board is being sought to be stuffed in a particular direction which would prompt the discerning people to look askance, and make it hard for RBI to frame policies".

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