An Economic Times report, today, said that the government has invoked Section 7 of the RBI Act, which would be the first time in the history of Independent India. As the tensions between the central bank and the government escalated over the regulator’s autonomy, the report further said that the centre sent several letters to the RBI governor on issues regarding the liquidity for Non-Banking Financial Companies (NBFC), capital requirements for weak banks or lending to MSMEs.
What is Section 7 of the RBI Act?
As a regulator, the Reserve Bank of India holds the right to make independent decisions. However, there is a provision in the RBI Act of 1934 that allows the government to take control when it is “public interest”. Here is the what the Section 7 of the act says,
“(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.
(2) Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
[(3) Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Governor nominated by him in this behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.]”
It is not clear as if Section 7 has been invoked and has to how it works since it has never been used before. The reason for the move was also unclear and so are the impact of it on RBI’s authority.