Government says consultations on with RBI, remains mum on Section 7

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Section 7 says that "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", a statute that has not been used in independent India, according to the Economic Times.

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 association said Acharya's comments about government's interventionist role vis-àvis the RBI have created a flutter across the nation.

Top sources indicated that the Central government played hardball and made things hard for the Central bank. "The central bank looked the other way, there was indiscriminate lending", he said.

The Reserve Bank of India governor Urjit Patel is considering all options including resigning from his post following an unprecedented attack on the central bank's functioning by Finance Minister Arun Jaitley.

Both these subjects have proven to be contentious issues in recent RBI board meetings, with non-official directors like S Gurumurthy in particularly forcefully arguing for them.

A government's horizon of decision-making is rendered short, like the duration of a T20 match (to use a cricketing analogy), by several considerations. Less important in the present scenario, but only recently so, wars had to be waged, financed and won at all costs.

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.

Tensions between the RBI and the government mushroomed after RBI Deputy Governor Viral Acharya said on Friday that undermining central bank independence could be "potentially catastrophic", indicating the authority was pushing back against government pressure to relax its policies and reduce its powers ahead of a general election due by May.

Perhaps the most contentious issue remains that of the RBI's reserves and capital on the central bank's balancesheet. Bond yields and prices move in opposite directions.

Acharya's speech came after a long-running spat between the government and the RBI over whether the central bank should part with some of its 3.6 trillion rupees ($48.73 billion) of reserves to help fund the country's fiscal deficit. Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of worldwide investors, and longer life spans.