News reports on Wednesday suggested that the government has invoked Section 7 of the Reserve Bank of India (RBI) Act, 1934, and RBI governor Urjit Patel could be on his way out. The finance ministry did well to put out a statement to control the damage, at least for now.
It is unlikely that the rift has ended; we are yet to see the last word on this avoidable clash. As Mint reported on Wednesday, the government is using Section 7 of the RBI Act as a threat to bring the central bank to the negotiating table. This will certainly not help fix any of the economic challenges the government is worried about.
Tension between the central bank and the government on policy rates, regulatory actions and the like is common—not just in India but around the world. However, the manner in which “RBI vs Government” has panned out and turned acrimonious is out of the ordinary and potentially damaging in both the short and medium term. If the government wants regulatory changes, it should make the suggestion and leave it to the central bank to take a call; forcing the latter’s hand will not help.