Govt Sends Letters to RBI Invoking Section 7 of RBI Act

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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. However, simmering tensions came to a head on October 26, when RBI Deputy Governor Viral Acharya, speaking at the A D Shroff Memorial Lecture in Mumbai, made a scathing statement against the government.

Amid instances of apparent differences between the government and the RBI, Acharya emphasised that undermining a central bank's independence is akin to committing a "self goal" for any government. 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. Following this, the finance minister blamed the RBI for its lending spree between 2008 and 2014 that left banks with huge debts.

"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".

"During 2008-14 after the global economic crisis to keep the economy artificially going, banks were told to open their doors and lend indiscriminately", he said in a speech at a conference attended by heads of US companies. It was a regulator of these. "They kept pushing truth below the carpet".

The currency fell as much as 0.5 percent to 74.0575 per dollar on Wednesday, after the Economic Times reported that the government invoked a rarely-used power to direct the central bank on matters of public interest.

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There's no official confirmation, but a letter has reportedly been sent.

The autonomy of the Reserve Bank of India (RBI) is "essential" and an accepted governance requirement, the government said on Wednesday in a rare statement issued amid reports of a rift with the central bank. Arguing against the Centre's proposal, the RBI had said, "The digital payments have made good and steady progress".

Financial markets have not reacted to the rift, but investors and traders are wary, as they want to see policymakers working closely together to stabilise India's fragile banking system and roiled markets. Essentially, they want to ease non-performing asset norms and relax lending norms for MSME companies.

In open letter, All India Reserve Bank Employees Association says govt must desist from nibbling at central bank's autonomy and let it do its job in an unfettered way, else it will incur the wrath of financial markets. The government believes that easing restrictions will boost lending and increase growth. The deputy governor even helpfully used a cricketing analogy to simplify the reasons that central banks and governments will always have different outlooks.