Published: Wed, October 31, 2018
Markets | By Noel Gibbs

Urjit Patel may resign as Jaitley’s remarks widen RBI-govt rift

Urjit Patel may resign as Jaitley’s remarks widen RBI-govt rift

The currency fell as much as 0.5 percent to 74.0575 per dollar on Wednesday, after the Economic Times reported that the government invoked a rarely-used power to direct the central bank on matters of public interest.

India's finance minister Arun Jaitley criticised the Reserve Bank of India (RBI) for failing to prevent lending excess in a speech on Tuesday.

The Section 7 of the RBI Act reads: "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". During this time, there has been an nearly complete breakdown in communication between the government and the central bank.

Jaitley had on Tuesday blamed the RBI for failing to stop a lending spree between 2008-2014 that left banks with huge bad debts, inflaming a row that recently erupted between the government and the central bank.

"I am not expecting the rift between the RBI and the government to widen, though prolonged tensions can not be fully ruled out considering the political angle to it in the run-up to the general elections", said Prakash Sakpal, an economist at ING Bank NV in Singapore.

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This did not go down well with the Centre, who said that they were 'upset' that the RBI publicly spoke about the rift. It has put lending curbs on some weak state-run banks, while the government - facing an election early next year - wants to ensure banks continue to lend to boost economic growth.

"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", Acharya said.

Another government official told Reuters that it was vital that what happened between the government and RBI was kept confidential. During his speech, he said in terms of decision-making, the government's horizon was that a T20 cricket match, while that of the RBI's was a test match.

At the time, most legal experts believed that it was unlikely the Modi government would issue directions under the rarely-used provision.

Unlike in the past, all four RBI deputy governors attended the FSDC meeting along with Dr. Patel.

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Patel had come under increasing criticism from the banking industry as well as the government over his handling of non-performing assets (NPAs) and his stance on the autonomy of the RBI.

According to sources, the government is not happy with Acharya's speech. The official said Patel may face a tough time when he appears before a parliamentary standing committee on November 12.

On Monday, a third government source said the finance ministry was anxious how markets would respond to Acharya's public comments, but felt more relaxed after they rose. The government, on its part, asked the RBI to prevent the spreading of contagion from the troubled IL&FS to other sectors of the economy, officials added.

The 10-year benchmark bond yield rose to 7.87 per cent from its previous close of 7.83 per cent. The rupee was last trading 0.5 percent weaker at 74.0575.

"When we are facing problems on the external front like high crude oil prices, trade tensions putting pressure on our current account balance, can we afford another domestic crisis?" the third government source said.

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