India Cites Never-Used Powers in Talks With RBI

Oct 31 2018, 4:54 AMOct 31 2018, 6:11 AMOctober 31 2018, 4:54 AMOctober 31 2018, 6:11 AM

(Bloomberg) -- India has cited a never-used legal provision in trying to resolve disagreements with the nation’s central bank, which could lead to the government directing the monetary authority to do its bidding if invoked, people with knowledge of the matter said.

The central bank has received letters from the government seeking Governor Urjit Patel’s views on issues including the authority’s handling of weak state-run lenders, tight liquidity in the market, and resolving bad loans at power generators, the people said, asking not to be identified because they aren’t authorized to talk to the media. The law cited by the government is Section 7 (1) of the Reserve Bank of India Act, according to the people.

Section 7 of the Reserve Bank of India Act:

(1) 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.

(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall 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 law empowers the government to consult and give instructions to the governor to act on certain issues that the state considers to be in the public interest. The letters prompted Deputy Governor Viral Acharya’s hard-hitting speech on Friday, in which he warned that toying with the central bank’s independence could lead to dire consequences, the people said.

Representatives at the Reserve Bank weren’t immediately available for comment. Economic Affairs Secretary Subhash Chandra Garg declined to comment, while Finance Secretary Hasmukh Adhia said it was for the Department of Economic Affairs to clarify on Section 7 of the law.

The letters are the latest flare-up in a dispute between the central bank and the government. The RBI under Patel has been pushing for more powers to clean up a banking system saddled with bad debts. The RBI has put lending curbs on some weak state-run banks, while the government -- facing an election early next year -- wants to ensure banks continue to lend to boost economic growth.

“The blame game can continue,” Sonal Varma, chief India economist at Nomura Inc., told Bloomberg Television. “India cannot afford these mistakes. The last thing India needs is to spoil the macro picture with this rift.”

Central banks around the world are facing heat from political leaders. U.S. President Donald Trump expressed his unhappiness with the Federal Reserve’s pace of tightening while Turkey’s leader Recep Tayyip Erdogan attacked his country’s central bank for rate hikes.

The dispute between India’s central bank and the government has been simmering for a few months now. It has come out in the open at a time when the economy -- currently the world’s fastest-expanding major one -- is facing risks from elevated oil prices, a weak currency and a crisis in the shadow banking sector.

On Tuesday, Finance Minister Arun Jaitley blamed the RBI for India’s huge bad debt pile up, saying it “looked the other way” while banks were allowed to lend indiscriminately in the aftermath of the global financial crisis. While those criticisms refer to events before Patel was governor, they can also be viewed as a counter to Acharya’s comments.

ET Now, a local television station, said on Wednesday that if the Reserve Bank refused to act on liquidity constraints, the government will not shy away from taking steps against it. The channel didn’t identify the people for the information.

“I am not expecting the rift between the RBI and the government to widen, though prolonged tensions cannot be fully ruled out considering the political angle to it in the run up to the general elections," said Prakash Sakpal, an economist at ING Bank NV in Singapore.