The government may choose to invoke Section 7 of the RBI Act, 1934 if the discussions between the government and RBI break down
Reserve Bank of India (RBI) Deputy Governor Viral Acharya could be in trouble if the ongoing conflict with the government escalates during the central bank's next board meeting on November 19, Mint reported.
There is worry the government could invoke Section 7 of the RBI Act, 1934, that allows it to consult with and give instructions to the RBI Governor on certain issues that it believes are serious and in public interest.
According to the report, at least four of the 11 independent directors of the central bank could move a no-confidence motion against Acharya for publicly airing his views protesting government interference, a person aware of the development told the paper.
It needs a minimum of four independent directors to assert an opinion or bring a no-confidence motion.
"The danger in this board meeting is that it will boil down to voting. If both sides do not budge from their positions after their presentations, they will have to walk out of the room. The government is clear that there needs to be a resolution of all the contentious issues at this meeting," the person said.
In case the government does issue any directions under section 7, 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. Thus, the five representatives of the central bank, including governor Urjit Patel, and the two finance ministry secretaries would have to withdraw from further deliberations of the board.
As a result, independent directors will then pass resolutions on contentious issues such as liquidity measures for non-banking financial companies (NBFCs) and micro, small and medium enterprises (MSMEs) and RBI’s 12 February circular.
Interestingly, Section 7 has never been invoked in independent India.
The spat between the government and the RBI has been going on for a while. The central bank, which is meant to function autonomously and independently, has alleged that the government has been trying to interfere in its functioning.
The government may have said that its ongoing dispute with the RBI should be resolved at the latter's board meeting on November 19, but that doesn't mean it is willing to give up or not use its right to issue a directive to the central bank.
According to the report, most independent directors are in favour of easing liquidity for NBFCs and small businesses. "However, on the issue of a new economic capital framework through which the government seeks transfer of a major chunk of RBI reserves, it is a divided house," the person told the paper.
The November 19 RBI board meeting is likely to start with a presentation by Economic Affairs Secretary, Subhash Chandra Garg, the report said.
"The first point that the DEA secretary could raise is the relationship between the RBI and the central government, which could lead to a discussion on Section 7. So the meeting will start with the most controversial issues on the agenda. The second point that could be raised is the 12 February RBI circular, which was challenged in the Allahabad high court," the person quoted above said.
For now, 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.The person cited above, however, told the paper that there is scope for a compromise.Are you happy with your current monthly income? Do you know you can double it without working extra hours or asking for a raise? Rahul Shah, one of the India's leading expert on wealth building, has created a strategy which makes it possible... in just a short few years. You can know his secrets in his FREE video series airing between 12th to 17th December. You can reserve your free seat here.