RBI autonomy essential, says finance ministry amid rift with central bank

Govt Sends Letters to RBI Invoking Section 7 of RBI Act: Reports

RBI governor Urjit Patel may consider resigning: sources

The industry body said that Reserve Bank of India needs to open limited special liquidity window (open direct lines of credit as RBI had opened liquidity window for mutual funds for a short-period in 2008 and 2013) to meet emergencies of financial Institutions including mutual funds which have been significantly impacted.

What inflamed the tension further was the statement by Union Finance Minister Arun Jaitley, who blamed the central bank for failing to stop a lending spree during 2008-2014 that left banks with $150 billion of bad bank loans.

A report by news agency Reuters said that Urjit Patel may consider resigning from his post given a breakdown in relations with the government headed by Prime Minister Narendra Modi. At this crucial juncture, when markets have started recovering after NBFC turmoil and supportive global cues, the resignation of the RBI Governor Urjit Patel will rattle investor sentiment, they say.

Far-sighted government leaders may be able to reap benefits of convincing voters about the importance of investing in macro-economic stability; for instance, by claiming credit for the long-term nature of financial sector outcomes attained by allowing the central bank autonomy in decision-making and delivery of its core functions. Sources said never in the history of RBI has a direction under Section 7 of RBI Act been issued to the central bank. While the Economic Affairs Secretary declined to comment on whether Section 7 had been invoked, the official statement also made no mention of it.

"It is hard to believe that the RBI governor will resign because it is unprecedented and would look quite irresponsible and (an) immature step", said a senior trader at a foreign bank.

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Top sources said three consultations were sent to the RBI in August, September and in the first week of October by the finance ministry.

In a statement issued hours later through the finance ministry, the government said the RBI's independence was "an essential and accepted governance requirement".

"The government of India has never made public the subject matter of those consultations". What is the need to invoke the provision now? This is equally true of all regulators.

From the tone of Acharya's speech, it appeared that the RBI is under tremendous pressure to hand over its surpluses squirrelled away over years and hence its decision to take the issue to the people.

"The markets have taken these developments in their stride as there is an inherent belief that the central bank is independent and will continue with its rules-based mandate, whilst the government focuses on reforms and looks to buoy growth, drawn also by the approaching elections". "We appeal to all right-minded people and experts to speak out and persuade the government to amend, and let RBI do its job in an unfettered way as per statutes, mandates, practices", the letter said.

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