In­dia govt set to turn up heat on RBI

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The In­dian 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 told Reuters.

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 Del­hibased 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 al­ready-weak fi­nan­cial mar­kets.

They have been hurt in re­cent weeks be­cause of de­faults by a ma­jor fi­nanc­ing com­pany.

A Fi­nance Min­istry spokesman de­clined to com­ment for this story.

The RBI did not re­spond to an email seek­ing com­ment.

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 cen-

tral 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 told Reuters, not­ing the gov­er­nor and his team would have to “ex­plain, de­fend and jus­tify” their de­ci­sions at the board meet­ing.

It is un­clear, though, how the gov­ern­ment will seek to ex­ert pres­sure through the RBI’s Cen­tral Board as the body is a largely sym­bolic one, which has never had a di­rect say in the bank’s di­rec­tives and poli­cies, ac­cord­ing to two ad­di­tional sources with knowl­edge of the law un­der which the cen­tral bank op­er­ates.

“The role of the board has typ­i­cally been to su­per­vise the work­ings of the RBI, like in­ter­nal au­dit and re­cruit­ment.

But the RBI is not re­ally ac­count­able to the board for reg­u­la­tory and op­er­a­tional is­sues,” said one of the sources, say­ing this would only change if the gov­ern­ment in­vokes Sec­tion 7 of the RBI Act al­low­ing it to dic­tate pol­icy to the cen­tral bank.

“We don’t know whether the board will su­per­sede the RBI in that case,” said the source. “This kind of sit­u­a­tion has never arisen be­fore.”

Still, the gov­ern­ment sources say they will find ways to in­crease pres­sure on the RBI and Pa­tel via the board be­fore mov­ing to in­voke Sec­tion 7.

“Pa­tel and his team must recog­nise the pe­riod of an in­vis­i­ble RBI board is over,” one of the New Delhi-based sources said, not­ing that the RBI will sooner or later have to fall in line.

Pa­tel: Un­der pres­sure.

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