Indian Government Emphasizes Central Bank's Autonomy Facing Falling Markets

NEW DELHI / MUMBAI (Reuters) – The Indian government said on Wednesday that the autonomy of the Reserve Bank of India (RBI) was "essential" because it aimed to appease investors worried about the growing public feud with the central bank.

Indian stocks and bonds fell and the rupee weakened earlier in the day, while RBI governor Urjit Patel might consider resigning given the breakdown in relations.

The media also reported that the government had invoked powers never before used to instruct the governor of the central bank on matters of public interest.

In a statement issued a few hours later by the finance ministry, the government said the independence of the RBI was "an essential and accepted requirement for governance."

The government added that it will continue to conduct extensive consultations with the central bank to advise on certain issues and suggest possible solutions.

But it was not clear whether she had used for the first time powers under the RBI law to give instructions to the bank. The Economic Times reported that the government had sent letters to Patel in recent weeks in the exercise of these powers.

Indian television channels CNBC-TV 18 and ET Now both reported earlier today that Patel could resign. The RBI declined to comment.

"The statement is ambiguous and does not completely solve the problems that arise," said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai.

"Yet it seems that the finance ministry is trying to lower the temperature."

The Economic Times reported that section 7 powers had been invoked for issues ranging from liquidity for non-bank financing companies to capital requirements for fragile banks and small loans. and medium-sized enterprises.

VOLTAGE BALLOON

Indian markets offset some initial losses after reporting, but still seemed tentative.

The BSESEN.NSEI BSE and NSE benchmark indices increased by about 1%, while the INR = D4 rupee was at 73.85 for the dollar, up from 74.14 but still down that day .

The return of the 10-year reference bonds IN071728G = CC was 7.87% compared to its previous closing of 7.83%.

Tensions between the RBI and the government have increased after RBI deputy governor Viral Acharya said on Friday that undermining the central bank's independence could be "potentially catastrophic," indicating that the bank's independence could be "catastrophic". authority was pushing back the pressure of the government to soften its policies and reduce its powers before a general power. election scheduled for May.

Investors fear that a protracted conflict between the government and the RBI may have an impact on decision-making as Indian financial markets have been hit hard by a series of defaults of one of the most major infrastructure finance companies. This has resulted in a lack of liquidity in the overall non-bank financial sector.

"We have a fairly fragile financial system, between public sector banks and non-bank financial companies," said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services.

"If the top executives of RBI come out, there would be a risk of instability that would be perceived and that could have an impact on the economy and the market in general."

According to World Bank data, India's economy surpassed that of France in 2017 to rank sixth worldwide and close to that of the United Kingdom.

OPEN

Acharya's speech came after a long-running feud between the government and the RBI over whether the central bank should divest part of its 3,600 billion rupees ($ 48.73 billion) ) reserves to help fill the country's budget deficit.

Government officials have also called on the RBI to relax the strict lending rules for troubled banks and are attempting to reduce the RBI's regulatory powers by setting up a new payments regulator.

Finance Minister Arun Jaitley on Tuesday accused the central bank of not ending a wave of lending in 2008-2014 that left banks with $ 150 billion in bad debts.

Patel and his deputy governors are expected to meet with senior Finance officials on Friday. The TV stations said Patel had called a meeting of the RBI council on November 19.