The tensions between the government and the Reserve Bank of India (RBI) continued as the former invoked the powerful-but-never-used Section 7 of the RBI Act to initiate consultations with the central bank through three letters on a range of contentious issues, including the corrective regime for weak banks, liquidity crunch, capital adequacy norms for banks and credit to micro, small and medium enterprises (MSME).

In its reply, the RBI stuck to its stance, without promising changes that the government may have wanted, sources said. However, the finance ministry hasn’t yet given direction to the RBI to abide by its diktat using the Section 7 that gives powers to the government to seek consultations with the central bank as well as give it binding orders, if necessary, in public interest, said the source.

Now, the invocation of the section — which was never used even in times of wars or balance of payment and sub-prime crises — may have added to the RBI’s discomfiture and triggered deputy governor Viral Acharya’s stern warning last week against “potentially catastrophic” consequences of any government incursion into the central bank’s autonomous regulatory space.  The Section 7 has three parts, of which the first one is the most relevant here. It says: “The central government may from time to time give such directions to the Bank (RBI) as it may, after consultation with the governor of the bank, consider necessary in the public interest.”