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It is considered as an instrument of last resort, a direct order from the government of the day to the central bank to fulfill its wishes.
The Modi government, despite growing frustration with the RBI led by Urjit Patel, resisted suggestions that it would invoke section 7 to increase liquidity, ease pressure on banks and businesses, and spur growth economic. However, there are indications that, through recent communications, she has initiated a consultation process with the RBI in three areas of concern and, in doing so, has referred to section 7 without invoking it.
These areas are energy sector lending, "quick fixes" (PCA) and special exemptions for micro, small and medium enterprises (MSMEs).
Article 7 of the RBI Act states: "The Central Government may, from time to time, issue instructions to the Bank which it may, in consultation with the Governor of the Bank, deem necessary in the public interest."
The government's decision is important to the extent that such a consultation process could eventually lead the government to issue instructions should the blockage persist.
RBI vs government: 10 flash points between the center and the central bank
What is unusual in the current stalemate, it is the number of problems on which it has spread and its duration. The interest rate, the perpetual point of fire, has been overtaken by several other territorial wars. The dividend, the restructuring of February 12, the regulation of public sector banks, reserves, appointments to boards of directors, etc.
The issue of the invocation of Article 7 was raised for the first time in a hearing before the High Court of Allahabad in the context of a complaint filed by Independent Power Producers in which it disputed the circular of 12 February of the RBI, which removed any loan restructuring program outstanding. After RBI 's lawyer had stated that the government could legally instruct the central bank, the court, in its August ruling, said such an approach could be considered.
Historically, whenever governors have talked about the independence of the central bank, they have never failed to point out that Article 7 had never been used.
A senior government official said that nothing had been done to invoke article 7. Another person, when asked, said: "Communication between the government and the central bank is sacrosanct and can not be divulged.
Tensions between Patel's RBI and the government are reaching their boiling point
In the corridors of power and wealth in New Delhi and Mumbai, the growing schism between the government and the RBI, and particularly its governor Urjit Patel, has been the subject of much discussion since the first months of this year. . During this period, communication between the government and the central bank was almost completely interrupted.
It appears that it was the government's mention of Article 7 that triggered the explosion of Deputy Governor Viral Acharya against the government last Friday. Although he made no reference to the section, he did however explain how the government could undermine the independence of the central bank by "blocking or opposing bank policies." centralized rules and by favoring discretionary or joint decision-making with direct government interventions ". .
The government wants the norms for unproductive assets in the electricity sector – which currently require companies to go to bankruptcy courts – to be relaxed. Once admitted, the companies must be sold or liquidated.
His concern with "prompt remedies" is that the PCA's classification placed restrictions on lending and expansion to 11 state-owned banks and a private bank, which it says stifles flow of funds in several sectors. The government is also concerned about the fate of MSMEs and wants the definition of bad debt to be relaxed.
The liquidity situation is further aggravated after a series of IL & FS failures in September. The failures had a cascading impact: the MFs that had invested in the IL & FS debt were affected, the companies that had placed short-term funds in MFs became cautious and the funds themselves became cautious about the down payment in financial companies.
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