"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. The association said Acharya's comments about government's interventionist role vis-àvis the RBI have created a flutter across the nation. The statement issued by the union said, the hiatus has widened now and the deputy governor has spoken more "in disgust and despondency" due to continuous nibbling by the government and the finance ministry.
"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. "For the goal of extensive consultations on several issues take place between the government and the RBI from time to time". "We firmly hold that undermining the central bank is a recipe for disaster and the government must desist", the All India Reserve Bank Employees Association said in a letter.
Government officials have also called for relaxation of strict RBI lending rules for weak banks and are trying to trim the RBI's regulatory powers by setting up a new payment regulator.
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". A statement from the government clarifying on the issue clearly acknowledges the need for RBI autonomy within the framework of RBI Act, by calling it is essential and accepted in an economy.
Reports suggest that the Centre has sent letters to the RBI invoking Section 7 of the RBI Act on Wednesday, 31 October, allowing it to issue directions to the central bank governor on matters of public interest.
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"It is hard to believe that the RBI governor will resign because it is unprecedented and would look quite irresponsible and (an) immature step", said a senior trader at a foreign bank. Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs.
Finance Minister Arun Jaitley, meanwhile, has blamed the RBI's inability in identifying the problem of NPAs in Indian banks and lack of timely measures for the current crisis-like situation in the banking sector.
This temporarily takes away the RBI's independence and autonomy.
What does Section 7 of the RBI Act say? 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.