In case discussions between the government and RBI break down, the government may choose to invoke Section 7 of the Reserve Bank of India Act, 1934, and at least four of the 11 independent directors of the central bank could move a no-confidence motion against Acharya for publicly airing his views protesting government interference, the person said, asking not to be identified because of the sensitivity of the matter.
If Section 7 of RBI Act is invoked, the five representatives of the central bank, including governor Urjit Patel, and the two finance ministry secretaries have to withdraw from further deliberations of the board. The independent directors will then pass resolutions on contentious issues such as liquidity measures for non-banking financial companies (NBFCs) and micro, small and medium enterprises (MSMEs) and RBI’s 12 February circular.
“The danger in this board meeting is that it will boil down to voting. If both sides do not budge from their positions after their presentations, they will have to walk out of the room. The government is clear that there needs to be resolution of all the contentious issues at this meeting," the person said.
Once the government invokes Section 7, the powers of the RBI board will be supreme.
“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," the relevant part of Section 7 (2) of the RBI Act says.
“The assertion of powers of the RBI board never came up all this while as the importance of section 7.2 was never realized," the person said.
Most independent directors are in favour of easing liquidity for NBFCs and small businesses. “However, on the issue of a new economic capital framework through which the government seeks transfer of a major chunk of RBI reserves, it is a divided house," the person said.
The government and some independent directors are upset with Acharya for his public outburst following RBI’s 23 October board meeting. “It needs a minimum of four independent directors to assert an opinion or bring a no-confidence motion," the person added.
The October board meeting ran for eight hours but only two items could be discussed after the presentation by financial services secretary Rajeev Kumar.
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The 19 November RBI board meeting will start with a presentation by economic affairs secretary, Subhash Chandra Garg which he could not make in the last meeting.
“The first point that the DEA secretary could raise is the relationship between the RBI and the central government, which could lead to a discussion on Section 7. So the meeting will start with the most controversial issues in the agenda. The second point that could be raised is the 12 February RBI circular, which was challenged in the Allahabad high court," the person said.
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Acharya, in his speech, had said that the government is trying to undermine the independence of the central bank, which could invite the wrath of financial markets.
Things took an ugly turn when Garg on 2 November tweeted: “Rupee trading at less than 73 to a dollar, Brent crude below $73 a barrel, markets up by over 4% during the week and bond yields below 7.8%. Wrath of the markets?"
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Without naming RBI, former central bank governor Bimal Jalan, in an interview to Mint on 5 November, said if there are irreconcilable differences of opinion between a regulator and the government, the head of the regulator must step down. “Then you should move and somebody else should come," he had said.
However, the person cited above said that scope for a compromise still exists. “It should not be a fight of egos. Both sides should show maturity," he added.