Govt set to turn up heat on RBI governor
Central bank under pressure to ease lending, transfer surplus reserves
NEW DELHI/MUMBAI: The government intends to keep pressing demands for the country’s central bank to relax lending curbs and hand over surplus reserves even if it risks provoking a resignation by the bank’s governor, three sources familiar with the government’s thinking said.
While there appeared to be a partial truce last week when the government said it respected the autonomy of the Reserve Bank of India (RBI), the sources said the government will turn up the heat at the bank’s central board of directors meeting on November 19.
And RBI Governor Urjit Patel will be a key focus of the pressure from a group of directors who support the government’s position, according to the New Delhi-based sources, who declined to be named due to the sensitivity of the matter.
“We want the RBI governor to accept the priorities of the economy and to discuss these with board members,” said one of the sources, a senior government official with direct knowledge of deliberations. “If he wants to take decisions unilaterally, it will be better for him to quit.”
Investors and traders warn that if Patel quits it will create uncertainty and undermine India’s alreadyweak financial markets. They have been hurt in recent weeks because of defaults by a major financing company. “POTENTIALLY CATASTROPHIC” Tensions between the two sides came to the fore last month when RBI Deputy Governor Viral Acharya gave a speech that blew the lid off a fractious dispute between the bank and the government of Prime Minister Narendra Modi on issues ranging from lending curbs to who controls the institution’s reserves.
Acharya said that undermining central bank independence could be “potentially catastrophic”, and he even cited meddling by the Argentine government in the affairs of its central bank in 2010 – prompting big drops in that nation’s financial markets - as a sign of how bad things can get.
For its part, government officials say they have been increasingly frustrated by the intransigence of Patel and his team to address its demands and engage in constructive dialogue.
The RBI has consistently pushed back against calls from the government to hand over more money from its reserves to help fund the fiscal deficit.
The ruling Hindu nationalist Bharatiya Janata Party is also keen to reduce curbs on the shadow banking sector and increase overall lending to small and medium-sized businesses. The aim is to help offset economic headwinds from low farm prices and high fuel prices ahead of a general election due by next May and key state elections in a few weeks.
“We will do everything to protect the interests of the economy,” one of the members of the RBI central board said, noting the governor and his team would have to “explain, defend and justify” their decisions at the board meeting.