"The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions", he said. "This is equally true for all other regulators", the finance ministry said.
The union, in a letter to the media on Monday, urged the government to allow the RBI to do its job in an "unfettered way" and warned that undermining the central bank's autonomy is a 'recipe for disaster and the government must desist'. But at the same time, there is an unmistakable sense of displeasure and warning from the government when it says that it frequently consults with RBI on important matters but never goes public with these matters.
According to the provision, the Central government may issue directions to the RBI as it may "consider necessary in public interest" after consultation with the RBI Governor.
Reserve Bank of India Deputy Governor Viral Acharya's speech last week was seen by many as a clear indication of the friction between the government and the central bank, which has now properly spilled over into the public domain.
The Finance Ministry on Wednesday issued a statement that said the central bank's autonomy is "an essential and accepted governance requirement".
Rajya Sabha MP Subramanian Swamy showed his support for Patel and tweeted: "If RBI governor resigns then it is a direct effect of FM blaming him publicly yesterday for NPAs".
Adding to the row, Finance Minister Arun Jaitley blamed the central bank for failing to stop a lending spree during 2008-2014 that left banks with $150 billion of bad debt. RBI and the government have reportedly been at the loggerheads over several issues including the government demanding ease in lending rules for at least 11 banks under prompt corrective action (PCA) framework, while the regulator thinks otherwise.
From the tone of Acharya's speech, it appeared that the RBI is under tremendous pressure to hand over its surpluses squirrelled away over years and hence its decision to take the issue to the people. Section 7 deals with "management" of RBI. The government, through these consultations, places its assessment on issues and suggests possible solutions.
Earlier, a letter by the All India Reserve Bank Association had said that the deputy governor, Viral Acharya, spoken more "in disgust and despondency" due to continuous nibbling by the government and the finance ministry.
There has even been talk of RBI Governor Urjit Patel tendering his resignation if, indeed, the government does invoke Section 7 and order the central bank to act a certain way. "The Government will continue to do so".
The letter said, "Even the RBI board is being sought to be stuffed in a particular direction which would prompt the discerning people to look askance, and make it hard for RBI to frame policies".