Economy

RBI vs Government: Here's what Section 7 of the RBI Act states

Updated : November 01, 2018 06:27 AM IST

Government sources on Wednesday clarified that Section 7 of the Reserve Bank of India Act of 1934 had never been formally invoked, a conversation and consultation maybe on. However, the sources added that letters of consultation under Section 7 were invoked three times.

The clarification came after several news reports claimed that the government had invoked the section amid the ongoing feud between the centre and the central government.

Here is what Section 7 of the Reserve Bank of India Act of 1934 says:

The Section 7 of the RBI Act says, “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”, meaning the government, in consultation with RBI governor, can give direct orders to the central bank to go ahead and carry out its wishes in public interest.

It is considered to be a decision that can be taken as the last resort to increase liquidity, ease pressure on banks and businesses and boost economic growth.

Currently, the concerns before the economy are power sector loans, ‘prompt corrective action’ (PCA), etc.

The first time, the talks of invoking Section 7 took place during the power matter which was taken up by the Allahabad High Court in which a case was filed by power producers challenging the RBI’s February 12 circular. The High Court at that time had said that invoking of the section could be considered. However, the government had said that it had no intentions to invoke the section.

The second letter was invoked on the usage of the capital reserves by the central bank and the third for relaxing the constraints on prompt corrective actions for the banks on loans to small and medium enterprises.

Sources have told CNBC-TV18 that the government is likely to issue specific directions to the central bank on any or all the three issues.

The ongoing war of words between the RBI and the government escalated on Wednesday with sources claiming that the central bank governor Urjit Patel was considering stepping down from his post following an unprecedented attack on the central bank’s functioning by Finance Minister Arun Jaitley.

The government, however, can dismiss the governor under Section 11 of the RBI Act.

The Reserve Bank of India(RBI) on Friday publicly criticised the centre over "permanent trampling of institutions", referring to the government's pressure to relax its policies and reduce its powers.

RBI vs Government: Here's what Section 7 of the RBI Act states

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