Govt. directions to RBI under Section 7 unlikely

Easing of PCA framework on the cards at board meeting
The Union government may not invoke Section 7 of the RBI Act to issue directions to the central bank, in a bid to reduce the tension between North Block and Mint Road, sources privy to the government’s thinking told The Hindu . “It is understood that the government has decided that it will not issue directions to the RBI… it is felt that there is no need for escalating the tension,” said a source. The central board of the RBI will meet on Monday to discuss contentious issues that figured at the last board meeting — economic capital, governance issues of the central bank, boost for the micro, small and medium-sized enterprises and the prompt corrective action (PCA) framework for banks. The October 23 board meeting failed to reach a consensus on any of the issues and was adjourned after an eight-hour discussion. Though the government had ‘referred’ Section 7 of the RBI Act for ‘consultation’ on these issues, it may refrain from issuing directions as such a move will have wide ramifications. Section 7 has never been used in the 83-year history of the bank. Invoking it would be interpreted as interference in the central bank’s autonomy. It would also have a bearing on international agencies such as the International Monetary Fund (IMF) that issue ratings for central banks. “These agencies have been raising the issue of Section 7 for sometime now, saying ‘if such a provision exists, how can RBI be independent?’ However, the RBI has been telling them that though that provision exists, it has never been used,” said an another source.

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