It reads: "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".
In light of the very public row between the Modi govt and RBI over the latter's NPA rules, there's been talk that the govt could invoke Section 7 of RBI Act.
Although the government has issued a press statement on Wednesday afternoon in a bid to clarify controversy surrounding invocation of section 7, sources said the tussle has been going on for quite some time and it all started with "forced demonetisation" by the government in 2016.
The RBI and the finance ministry declined to comment.
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Top sources indicated that the Central government played hardball and made things hard for the Central bank. "I am surprised that at that time, the government looked the other way, the banks looked the other way".
The rift between the RBI Governor Urijit Patel and the Central government reportedly widened with Central Bank's Governor considering to resign from the post of the Governor.
Acharya's speech is, as a result, remarkable in how well it lays out exactly what seems to be happening between the Centre and the RBI right now, especially with talk of Patel considering what Redrado did: resignation. As elections approach, delivering on proclaimed manifestos of the past acquires urgency; where manifestos can not be delivered upon, populist alternatives need to be arranged with immediacy. This myopia or short-termism of governments is best summarized in history by Louis XV when he proclaimed "Apres moi, le deluge!"
In contrast, a central bank plays a Test match, trying to win each session but importantly also survive it so as to have a chance to win the next session, and so on.
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They have won only one of their last seven matches in all competitions and the pressure is on at Old Trafford. But some of them wouldn't and kept the players and we didn't even know the dimension and nature of injuries.
Government said that it holds "extensive consultations" with the central bank from time to time.
The Central Bank Governor has called for a board meeting on November 19 to discuss the pending issues and also discuss on the issues that have led to a tug-of-war kind of situation beteween RBI and government. Bond yields and prices move in opposite directions.
The development comes amidst growing rift between the centre and the central bank after the RBI deputy governor Viral Acharya, in a fiery speech, warned that undermining a central bank's independence could be "potentially catastrophic".
India's $2.6 trillion economy surpassed France's in 2017 to become the world's sixth largest, and is not far behind that of the United Kingdom, according to World Bank data.
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As many parts of the world today await greater government respect for central bank independence, independent central bankers will remain undeterred.