RBI autonomy is ‘essential, accepted governance requirement’: Finance Ministry

Open rift between RBI Modi govt as official warns of catastrophe

In response, RBI Governor Urijit Patel had blamed regulatory constraints as the RBI's powers to regulate public sector banks is limited.

Reports about Urjit Patel stepping down as the RBI governor started floating following Finance Minister Arun Jaitley's scathing criticism of the central bank's "lending spree", reports quoted sources as saying on Wednesday.

Government said that it holds "extensive consultations" with the central bank from time to time.

A report by news agency Reuters said that Urjit Patel may consider resigning from his post given a breakdown in relations with the government headed by Prime Minister Narendra Modi. The Economic Affairs Secretary on Wednesday, however, refused to comment anything with respect to it.

The senior Congress leader said that the governments he was a part of in the past had never used Section 7 of the Reserve Bank of India Act of 1934, under which a direct order can be issued by the government to the central bank to carry out its wishes in "public interest".

"A tug-of-war between the central bank and government has occurred in the past, with exchanges usually heating up in a tough economic environment".

"The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions", he said.

According to Livemint, the government is unlikely to invoke Section 7 of the Reserve Bank of India Act though it is using it as a threat to get the central bank to the negotiating table on a host of issues, including the more recent liquidity crisis that has impacted non-banking finance companies.

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It also said that all regulators and government need to present a coordinated front while addressing the current issues.

The micro, small and medium enterprises (MSME) sectors and power producers have been the worst affected, and have sought more time for resolution.

Prompt corrective action (PCA): 11 public and 1 private bank in the country have been placed under what is called a PCA framework - rules the RBI puts in place for weaker banks - which bars lending by these banks, among other things, until they strengthen their capital base.

It further claimed that the government has invoked never used before Section 7 of the RBI act.

The issue of Section 7 first came up during an Allahabad High Court hearing on a case filed by Independent Power Producers challenging an RBI circular issued on 12 February.

The statement said the government has never made public the subject matter of those consultations. "It shows that government is hiding facts about the economy and is desperate (sic)", he said in a series of tweets. The speech was taken as a symptom of the fight between the government and the RBI.

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.

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