India central bank autonomy ‘essential’
INDIA’S government stressed yesterday that the autonomy of the Reserve Bank of India (RBI) is “essential” as it sought to calm investors worried about a growing public quarrel with the central bank.
Indian stocks and bonds fell and the rupee weakened earlier in the day amid reports that RBI governor Urjit Patel may consider resigning, given the breakdown in relations.
The reports also said the government had invoked never-before-used powers to issue directions to the central bank governor on matters of public interest.
In a statement issued hours later through the Finance Ministry, the government said the RBI’s independence was “an essential and accepted governance requirement”.
The government added that it would continue to carry out extensive consultations with the central bank to give its assessments on issues and suggest possible solutions.
But it was unclear if it had used powers for the first time under the RBI Act to give the bank instructions. The Economic Times reported the government had sent letters to Patel in recent weeks exercising those powers.
CNBC-TV 18 and ET Now both reported earlier in the day that Patel might resign. The RBI declined to comment.
“The statement is ambiguous and does not fully clarify the issues at hand,” said A Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai.
“Still it does sound like the Finance Ministry is trying to dial down the temperature.”
The Economic Times report said that the Section 7 powers had been invoked on issues ranging from liquidity for non-bank finance companies, to capital requirements for weak banks and lending to small- and medium-sized companies.
Indian markets clawed back some early losses after the statement but still appeared tentative.
Benchmark stock indexes BSE and NSE rose around 1 percent.
The 10-year benchmark bond yield was at 7.87 percent from its previous close of 7.83 percent.
Tensions between the RBI and the government mushroomed after RBI deputy governor Viral Acharya said on Friday that undermining central bank independence could be “potentially catastrophic”.