India: Government set to turn up heat on RBI governor Urjit Patel

  • 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 19 Nov 18.
  • 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.
  • 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.
  • 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.
  • “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’s predecessor Raghuram Rajan defended the RBI’s call for autonomy saying that the central bank’s responsibility is to secure financial stability and it has the right to say “no” to government proposals that could lead to instability.

External Link: https://economictimes.indiatimes.com/news/economy/policy/government-set-to-turn-up-heat-on-rbi-governor-urjit-patel/articleshow/66525545.cms

6-Nov-2018


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