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The Unprecedented RBI-Govt Rift: Impact Will Be Far-Reaching

According to sources, the government may implement Section 7 of the RBI Act to weaken the institution’s autonomy.

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A tussle is brewing between the government and RBI. According to sources, the government may implement Section 7 of the RBI Act to weaken the institution’s autonomy – no Indian government has ever done this before.

What Is the Significance of This Issue?

Due to the scarcity of cash in the market, the government wants to take a loan from the Reserve Bank which tightens the noose around 'weak' government banks.

In order to give money to the Ministry of Micro, Small and Medium Enterprises (MSME), the government wants to be free from RBI's strict control. After a fear of cash crunch in the case of Infrastructure Leasing & Financial Services (IL&FS) defaults, a tussle between the government and Reserve Bank over sending power companies to National Company Law Tribunal (NCLT) emerged.

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What Is the Issue?

During the IL&FS crisis, people lost their faith in the market. Even foreign investors started withdrawing their capital and the value of the rupee fell. Keeping the fiscal deficit in check is a matter of concern ahead of the 2019 Lok Sabha elections. The government is looking to the Reserve Bank for money but arrangements should have been made beforehand.

How Did This Crisis Come to the Forefront?

RBI Deputy Governor Viral Acharya has said that there is an attempt to hamper the RBI's autonomy. The Centre indirectly said that the RBI has leaked information. RBI has been reiterating that it is the government's responsibility to tighten the noose around government banks.

Amidst the economic crises in the country, the RBI-government tussle comes as a matter of concern.

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What Is the Political Motive Behind It?

The claims of maintaining discipline, stopping non-performing assets (NPA) from increasing, stopping crony capitalism from flourishing – are proving to be false. The government is desperate to collect funds before the elections. The NDA government had promoted Urjit Patel to the post of RBI governor, and he is now desperate to maintain RBI's autonomy.

There are shortcomings when it comes to RBI regulations but at this time, the government should maintain good relations with other institutions. The Centre has hinted at a discussion but one doesn’t seem to have occurred. So, the tussle between the RBI and the government has come to the forefront. There has always been tension between the two but that has always been resolved too through off-the-record talks.

(This story was originally published on Quint Hindi)

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