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Last Updated : Oct 31, 2018 01:22 PM IST | Source:

Govt vs RBI: All you need to know about Section 7 of the RBI Act

Multiple media reports say the government has decided to invoke Section 7 of the RBI Act. The Section, when invoked, clamps down on the autonomy of the central bank.

Moneycontrol News @moneycontrolcom

The ongoing spat between the government and the Reserve Bank of India has left many on tenterhooks. The central bank, which is meant to function autonomously and independently, has alleged that the government has been trying to interfere in its functioning.

This is a serious allegation. In a speech on October 26, RBI Deputy Governor Viral Acharya warned that undermining the autonomy and independence of the central bank could prove to be "potentially catastrophic".

On October 31, India woke up to multiple media reports saying the government has decided to invoke Section 7 of the RBI Act in order to get its way. People were trying to make sense of what was happening, starting with what 'Section 7' actually is.

What is Section 7?

Section 7 of the RBI Act, when invoked, allows the government to consult with and give instructions to the Governor of the RBI on certain issues that it believes are serious and are in public interest.

In case the government does issue any such directions, the business and functions of the RBI will be entrusted to a Central Board of Directors that can exercise all powers and perform all functions of the central bank.

To be sure, unless specified otherwise by the Central Board, the governor, and in his absence a deputy governor appointed by him, will continue to be able to perform all functions and exercise all powers.

Interestingly, Section 7 has never been invoked in independent India. And it was not because everything has been hunky dory over the past seven decades.

The government invoking Section 7 would essentially result in the central bank losing its autonomy temporarily. Even in the country's darkest days as an economy, say in 1991 or in the period that followed the 2008 financial crisis, the government never went down that road.

So what is the danger of invoking Section 7? One could argue that if the RBI is being ignorant about something necessary, the government should be able to go over its head and intervene. But resorting to such an extreme measure would set quite a dangerous precedent.

Well, for now, the stalemate goes on. There has been no concrete announcement or statement from either party on the issue and it is left to be seen if the government will actually resort to invoking Section 7.
First Published on Oct 31, 2018 10:04 am
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