As the row between the government and the Reserve Bank of India intensified, the former has invoked Section 7 of the RBI Act, which allows it to issue directions to the governor of the central bank in matters relating to public interest.
The Centre has reportedly sent letters to RBI governor Urjit Patel in the recent weeks, exercising its powers under this section, on various issues like liquidity crunch in the NBFC sectors, capital requirement for banks and lending to small and medium enterprises.
This section has never been used in India until now, not even during the 1991 Indian economic crisis when the country was close to a default.
Relations between the government and the RBI have gone downhill over the past few months, with the government unhappy with the central bank’s interest rate policy.
Its decision to invoke the ‘prompt corrective action’ framework that restricts lending by NPA-hobbled banks, among others.
Yesterday, Finance Minister Arun Jaitley criticised the RBI for "looking the other way" during the UPA era when "banks were asked to lend recklessly".
Last week, RBI deputy governor Viral Acharya warned the government that there would be disastrous consequences if the central bank’s autonomy is undermined.
So far, markets have not reacted to the developments.>