The government intends to keep pressing demands for the country’s central bank to relax lending curbs and hand over high reserves even if it risks provoking a resignation by the bank’s governor, three sources similar 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 stated the government will turn up the heat at the bank’s central board of directors meeting on Nov. 19.
And RBI Governor Urjit Patel will be a major 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.
“We need 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 needed to take decisions unilaterally, it will be better for him to quit.”
Investors and traders warn that if Patel quits it will make uncertainty and undermine India’s already-weak financial markets. They have been hurt in current weeks because of defaults by a major financing company.
A Finance Ministry spokesman declined to comment for this story.
The online financial publication Moneylife reported on Wednesday that Patel could resign at the central bank’s next board meeting on Nov. 19, citing sources in touch with the governor.
Moneylife stated that Patel was tired of the struggle with the government, and it was having a negative impact on his health.
The RBI did not respond to requests for comment for this article or in response to the Moneylife report.
Tensions among 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 matters ranging from lending curbs to who controls the institution’s reserves.
Acharya alleged that undermining central 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 spoked 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 regularly 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 decrease curbs in the shadow banking sector and increase overall lending to small and medium-sized businesses. The focus 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.