The Finance Ministry on Wednesday acknowledged that the autonomy of the Reserve Bank of India (RBI) is an "essential and accepted governance requirement", but it neither confirmed nor denied that it had issued directives to the bank under Section 7 of the RBI Act. "Government of India has nurtured and respected this", it said in the statement.
Acharya saved his sharpest words for the very end though, effectively telling the Government of India what is going to happen if it tries to undermine the Reserve Bank of India. Sources said never in the history of RBI has a direction under Section 7 of RBI Act been issued to the central bank. 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. 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; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of worldwide investors, and longer life spans.
The rift between the RBI and the government turned ugly after RBI Deputy Governor Viral Acharya last week went public saying undermining a central bank's independence could be "potentially catastrophic".
Sources said Section 7 has two parts - consultation and then issuing a direction to RBI for taking some action in public interest.
It also said that all regulators and government need to present a coordinated front while addressing the current issues.
"Government of India has never made public the subject matter of those consultations".
From the tone of Acharya's speech, it appeared that the RBI is under tremendous pressure to hand over its surpluses squirrelled away over years and hence its decision to take the issue to the people. The government, through these consultations, places its assessment on issues and suggests possible solutions. "The government will continue to do so", it added. Both the Government and the Central Bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.
Jaitley had on Tuesday blamed the RBI for failing to stop a lending spree between 2008-2014 that left banks with huge bad debts, inflaming a row that recently erupted between the government and the central bank.
If the move was indeed true, it showed that the government was "desperate" and was hiding facts about the economy, he said adding the previous UPA government did not invoke Section 7 prior to liberalisation of the economy in 1991, the Asian financial crisis of 1997 or the period after the recession in 2008.