"We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013".
There have also been media reports that the government has invoked never-before-used powers under the RBI Act that allow it to issue directions to the central bank governor on matters of public interest. With this in mind, it is worth going back to Acharya's speech, the AD Shroff Memorial Lecture, on October 27.
Former Finance Minister P Chidambaram said the invocation of the section suggests the economy was in a bad shape and the government was trying to hide it. "We appeal to all right-minded people and experts to speak out and persuade the government to amend, and let RBI do its jobs in an unfettered was as per statutes, mandates, practices". The folloiwng can also be used by the government to push their agendas via Central Bank. "I am surprised that at that time, the government looked the other way, the banks looked the other way".
Both these subjects have proven to be contentious issues in recent RBI board meetings, with non-official directors like S Gurumurthy in particularly forcefully arguing for them. Giving a cricketing analogy, Acharya had said a government's horizon of decision-making was rendered short, like the duration of a T20 match, by several considerations. There are always upcoming elections of some sort - national, state, mid-term, etc. This myopia or short-termism of governments is best summarized in history by Louis XV when he proclaimed "Apres moi, le deluge!"
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The rift between the RBI and the Modi government turned ugly after Patel's deputy, Viral Acharya, said last week that attempts to undermine the central bank's autonomy could prove be 'potentially catastrophic'. Unsurprisingly, central banks strive to build credibility through a series of hard choices that reflect sacrificing short-term gains for long-term outcomes such as price or financial stability.
As mentioned in the report, Acharya's speech was only a strike in the long-running tug of war between the government and the RBI on whether the bank should part with some of its Rs 3.6 lakh crore reserves to fund the country's fiscal deficit.
Although the government in a bid to bring down the mounting tensions issued a statement saying that government has "nurtured and respected" autonomy of the Central bank and has been holding extensive consultations with it on many issues, the anxiety in the air was palpable.
As this dynamic plays out, markets watch keenly, and if uncertainty grows and confidence in central bank independence and credibility erode, then markets rap bond yields and exchange rate on the knuckles! "Regulators have a very important function".