The Indian government is preparing to heat the governor of the central bank


NEW DELHI / MUMBAI (Reuters) – The Indian government intends to continue to demand that the country's central bank eases loan regulations and re-deposits excess reserves, even if this could lead to the resignation of the governor of the country. bank, said three sources close to the Reuters government.

PHOTO FILE: The Governor of the Reserve Bank of India (RBI), Urjit Patel, attends a press conference after the bi-monthly monetary policy review in Mumbai, India, on Monday. December 6, 2017. REUTERS / Shailesh Andrade / Photo File

While there appeared to be a partial truce last week when the government declared that it respected the autonomy of the Reserve Bank of India (RBI), sources said the government was going to do Raise the pressure at the meeting of the central board of the bank on November 19. .

And the RBI's governor, Urjit Patel, will be at the center of pressure from a group of directors who support the government's position, according to New Delhi-based sources, who refused to give their names because of the delicate nature of the government. topic.

"We want the governor of the RBI to accept the priorities of the economy and discuss them with the board members," said one of the sources, a senior government official with direct knowledge of the deliberations. "If he wants to make decisions unilaterally, it will be better for him to resign."

Investors and traders warn that if Patel withdraws, this would create uncertainty and hurt the already weak financial markets of India. They have been injured in recent weeks due to failures of a large finance company.

A spokesman for the Ministry of Finance declined to comment on this story.

The online financial publication Moneylife reported Wednesday that Patel may resign at the next meeting of the central bank's board of directors on Nov. 19, citing sources in contact with the governor.

Moneylife said Patel was tired of fighting with the government and that it had a negative impact on his health.

The RBI has not responded to requests for comments for this article or the Moneylife report.

"POTENTIALLY CATASTROPHIC"

Tensions between the two sides appeared last month when RBI deputy governor Viral Acharya put an end to a twisted conflict between the bank and Prime Minister Narendra Modi's government over issues ranging from loan limitation. to the mastery of the institution. reserves.

Atcharya said undermining the independence of the central bank could be "potentially catastrophic", and he even cited the Argentine government's interference in the affairs of its central bank in 2010 – causing sharp declines in Financial markets of this country – as a sign of the seriousness of the problems get.

For its part, government officials say they are increasingly frustrated by the intransigence of Patel and his team, who have responded to his demands and engaged in a constructive dialogue.

The RBI has always rejected the government's calls for more money from its reserves to help fill the budget deficit.

The ruling Hindu nationalist Bharatiya Janata also wants to reduce restrictions on the shadow banking sector and increase global lending to small and medium-sized enterprises. The goal is to help offset the economic hurdles of low agricultural prices and gasoline ahead of the May general election and key elections in a few weeks.

"We will do everything to protect the interests of the economy," said one of the central board members of the RBI to Reuters, adding that the governor and his team should "explain, defend and justify" their decisions at the board meeting.

However, it is unclear how the government will seek to exert pressure through the central council of the RBI as it is a largely symbolic body, which has never been seen before. direct influence on the bank's guidelines and policies, according to two additional sources familiar with the law under which the central bank operates.

"The role of the board has generally been to oversee the operation of the RBI, such as internal audit and recruitment. But the RBI is not really accountable to the board for regulatory and operational issues, "said one source, noting that this would only change if the government invoked Article 7 of the the law on the RBI, allowing him to dictate his policy to the central bank.

"We do not know if the board will replace the RBI in this case," the source said. "This kind of situation has never existed before."

Nevertheless, government sources say they will find ways to increase pressure on the RBI and Patel via the board of directors before moving on to section 7.

"Patel and his team must recognize that the invisibility period of the RBI's board of directors is over," said one of the New Delhi-based sources, noting that the RBI should be early or late make his way.

Patel's predecessor, Raghuram Rajan, defended the RBI's call for autonomy, saying the central bank's responsibility was to preserve financial stability and that it had the right to say "no" to the RBI's proposals. government that could create instability.

"The RBI looks like a seatbelt," said Rajan, a professor at the Booth School of Business at the University of Chicago, at CNBC-TV18.

"As a driver, as a government, he has the option of not putting on the seatbelt, but of course, if you do not, you can have an accident that can be quite serious."

N.R. Bhanumurthy, an economist at the National Institute of Public Finance and Public Policy, a think-tank based in New Delhi and funded in part by the finance ministry, said the RBI and the government were dealing with the same problem though. There is a difference of opinion on the to solve it.

"While the government is looking for short-term solutions, the RBI is focusing on long-term solutions," he said, adding that despite disagreements, both could resolve their differences.

"If the governor of the RBI is forced to resign, it will be a huge setback for the economy."

Reportage of Manoj Kumar in New Delhi and Suvashree Choudhury in Mumbai; Edited by Martin Howell, Simon Cameron-Moore and Neil Fullick

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