The split between the Reserve Bank of India (RBI) and the government is wide open, with a report claiming the central bank’s Governor Urjit Patel is likely to resign. According to official sources Patel is likely to step down amid a fast-worsening relationship between the RBI and the government. The government is reportedly upset with some of the RBI’s decisions, including its move to restrict lending by NPA-laden banks under the “prompt corrective action” framework.
It also wants the RBI to transfer some of its reserves to the treasury because it believes that the central bank holds excessive reserves. On October 30, Finance Minister Arun Jaitley publicly criticised the RBI’s role during the UPA era, for “looking the other way” as banks lent recklessly. Last week, RBI Deputy Governor Viral Acharya, in a speech, talked about the importance of maintaining the RBI’s autonomy, saying any efforts to undermine it would “incur the wrath of financial markets and ignite an economic fire”.
Adding fuel to the fire were reports this morning that the government has decided to invoke Section 7, which allows the government to issue directions to the RBI governor “in public interest”. The decision, if taken, will become political fodder for the government’s opponents. Former finance minister P Chidambaram was quick to point out that the law had never been invoked before.