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Govt invokes never-used powers; RBI governor set to resign

Following increased friction between govt and Urjit Patel, the RBI governor is on verge of stepping down, according to latest reports.

The govt has flexed muscle invoking never-before-used powers under RBI Act, whereby it can issue directions to the central bank chief on matters of public interest.

There has been growing rift between the executive and Patel on issues pertaining to liquidity for NBFCs, capital requirement for weak banks and lending to SMEs’.

As if in anticipation, deputy governor Viral Acharya last week warned the Centre of disastrous consequences if the regulator’s autonomy is impinged upon.

Section 7 of the RBI Act allows government to consult and give instructions to the governor to act on certain issues that the government considers serious and in public interest.

However the  Section had never been used in independent India till now. It was not used even when the country was close to default in the dark days of 1991, nor in the aftermath of the 2008 crisis.

The impact of the aggressive move is not clear as it would be the first time experiment.

The backdrop
The govt and RBI has been fighting it out on a few issues for a while. While govt believes the central bank should ease lending rules for the 11 banks under prompt corrective action(PCA) framework, RBI stands its ground that such flexibility would undo clean-up efforts done so far.

It all started with IL&FS default on loans from non-banking financing companies(NBFCs)  sending the sector clamouring for liquidity. Though the lenders approached RBI for eased liquidity, the apex bank maintained that the banking system did not witness any spike in borrowing costs and the market was just repricing risk in an evolving situation.

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