After speculative reports surfaced on Wednesday morning that RBI Governor Urjit Patel may step down if the Government tried to arm-twist the Central bank by issuing directive under Section 7 of the RBI Act, the Finance Ministry on Wednesday took a prompt damage control exercise saying “autonomy of the Central bank is essential.”

But the twist in the tail is the Ministry’s assertion that the RBI’s functioning must be guided by public interest and needs of the economy.

“The autonomy for the Central bank, within the framework of the RBI Act, is an essential and accepted governance requirement. Governments in India have nurtured and respected this,” the Ministry said in a brief statement.

The Finance Ministry issued the statement after the equity market tanked on reports of Patel’s likely resignation and the Government faced  scathing criticism from several quarters for trying to bulldoze the Central bank to follow its political agenda.

The Ministry’s statement calmed down the stock market which staged a smart recovery and the benchmark sensex closed nearly 500 points up.

Later in the day, Finance Minister Arun Jaitley refused to be drawn into the row over his Ministry using a never-used provision under Section 7 of the RBI Act that gives it power to issue directions to the Central bank on matters of public interest, saying discussions and consultations with the Central bank have never been disclosed.

At a news conference, the Minister said he would not say anything more than what a Press statement issued by his Ministry on the RBI row said in the morning.

On Tuesday, Jaitley had slammed the RBI for indiscriminate lending, but on Wednesday he sounded much more reconciliatory.

Despite indication from the Government that it would continue to engage the RBI and respect its autonomy, there are telltale signs that the conflict between the Finance Ministry and the Central bank is far from resolved.

The RBI and the Modi Government are at loggerheads amid a standoff between the Ministry and the RBI over the Central bank’s handling of weak public sector banks, tight liquidity in the market and ways of resolving bad loans in the power sector, unconfirmed reports claimed.

News agency PTI quoted  sources  saying that the  Government has sent at least three letters on different issues under Section 7(1) of the RBI Act that gives it powers to issue any direction to the Central bank Governor on matters of public interest.

They, however, insisted that the Government has not taken any action of issuing any specific direction and has only initiated consultations with the Central bank on unresolved issues.

Without making any reference to the letters, the Ministry statement said, “Both the Government and the Central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy.”

“For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators,” it said.

The Government, it said, has never made public the subject matter of those consultations. “Only the final decisions taken are communicated. The Government, through these consultations, places its assessment on issues and suggests possible solutions. The Government will continue to do so.”

Sources said the Finance Ministry wrote three separate letters in the past few weeks to the RBI on issues ranging from Prompt Corrective Action (PCA) framework to liquidity management and sought consultation under Section 7 of the RBI Act.

The Government wants RBI to carve out exemption for power companies under the PCA framework that outlines triggers for declaring a loan account as stressed or NPA, said sources, adding the second letter pertained to use of RBI’s capital reserves for providing liquidity to the market and a third letter was for relaxing constraints on banks for loans to small and medium enterprises.

Section 7 of the RBI Act empowers the Government to issue directions to the Central bank, after consultation with RBI Governor, on issues that it considers serious and of public interest. This section has never been invoked before. Sources said Section 7 has two parts — consultation and then issuing a direction to RBI for taking some action in public interest.

Right now only consultations are on, which may or may not result in any direction being issued, sources said.

Former Finance Minister and senior Congress leader P Chidambaram warned of “more bad news” if indeed the Government were to invoke Section 7 of the RBI Act.

If the move was indeed true, it showed that the Government was ‘desperate’ and was hiding facts about the economy, he said, adding that the previous UPA Government did not invoke Section 7 prior to liberalisation of the economy in 1991, the Asian financial crisis of 1997 or the period after the recession in 2008.