Central bank-government feud threatens India’s economy

A threat to RBI’s autonomy could scare off foreign investors

Arift between India’s government and central bank threatens to derail Asia’s third-largest economy as it grapples with a perfect storm of problems including a plummeting rupee and cripplingly high fuel prices, analysts warn.

Prime Minister Narendra Modi’s administration has been accused of trying to influence Reserve Bank of India (RBI) policy — leading to fevered speculation that its chief Urjit Patel is set to quit.

Analysts have urged for an end to the standoff, warning the spat could ripple through the world’s fastest-growing major economy at a precarious time and with an election looming in the spring.

“With the rupee falling, oil prices surging and a host of local credit crunch issues, this is the last straw that can completely break down the working capacity of the RBI and government,” said Dun & Bradstreet India economist Arun Singh.

Indian business dailies have reported that Modi’s government has invoked never-before-used powers to send at least three letters to Patel seeking to impact the central bank’s decision-making.

Some newspapers reported that Patel was preparing to resign over the use of “Section 7” of the RBI Act — which allows the government to instruct the governor on matters of public interest — although the central bank has not commented publicly on whether the measure was used or not.

The government is believed to be unhappy with the bank over a number of issues including interest rates, how to deploy reserves and what to do to respond to India’s sliding rupee.

The rift flared up again when economic hardliners from a powerful Hindu nationalist group linked to Modi’s ruling Bharatiya Janata Party (BJP) told Patel to fall in line with the government or quit.

The rupee has been one of Asia’s worst performing currencies this year, tumbling 14 per cent against the dollar.