Economy

RBI responsible for NPA crisis, Jaitley makes spat more public

RBI responsible for NPA crisis, Jaitley makes spat more public”

In a speech last week, RBI Deputy Governor Viral Acharya warned that "governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution". "All options on the table", multiple sources familiar with the matter told CNBC-TV18 on Wednesday.

Will govt invoke Sec 7 for 1st time if RBI logjam persists? Reports add that the Central government has invoked some powers mentioned under the RBI Act in order to issue directions to the RBI Governor Urijit Patel.

Interestingly, Section 7 has never been invoked in independent India.

The RBI and the finance ministry declined to comment.

Sources reported that RBI governor Urjit Patel may tender his resignation willingly if government invokes Section 7 of RBI Act. The central bank has received letters from the government seeking Governor Urjit Patel's views on issues including its 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 council discussed at length the issue of real interest rate, current liquidity situation, including segmental liquidity position in NBFCs and the mutual fund space, an official statement said.

Three days after the speech, Reuters reported that the Centre is upset with the central bank for publicly talking about the rift.

Section 7 of the RBI Act empowers the government to issue directions necessary for public interest to the RBI from time to time after consultation with the RBI governor.

The benchmark stock index rose as much as 2.15 percent and the yields on the 10-year benchmark fell to 7.81 percent, compared with 7.88 percent on Friday.

Government officials believe that RBI Governor Urjit Patel has some responsibility for the controversy, and he can not expect an extension of his current three-year term - which ends next September - "as his right", one of the officials added. "But it is quite worrisome to see the government trying to continuously interfere into the RBI's operations".

Asked why all four Deputy Governors had come for the FSDC meeting, which is normally attended by one DG, a senior government official said that since the meeting had a long agenda covering various aspects, "it was proper for all four to come".

Government officials believe that RBI Governor Urjit Patel has some responsibility for the controversy, and he can not expect an extension of his current three-year term - which ends next September - "as his right", one of the officials added.

The Indian rupee slid on speculation that the rift between the government and central bank is widening.

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.

After the meeting ended, Patel did not have a one-to-one meeting with the Finance Minister or Secretaries.



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