RBI vs government: All eyes on Urjit Patel’s November 19 meeting

New Delhi: After one of the top officials of the central bank warned that undermining the The Reserve Bank of India’s (RBI) independence could be “potentially catastrophic”, there appears to be a serious disagreement between the RBI and government.

“Governments that do not respect central bank independence and will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” said RBI Deputy Governor Viral Acharya.

The RBI’s Central Board, headed by Governor Urjit Patel, is scheduled to meet in Mumbai on November 19, sources said amid reported rift between the government and the central bank over key issues.

It is a pre-scheduled and routine meeting of the central board of the RBI, as per sources. The last meeting of the board was held earlier in October. There are 18 members on the central board of directors of the RBI, including those nominated by the government.

Also read: RBI governor Urjit Patel to resign? Why apex bank and Centre grew apart over months

The November 19 meeting would be the first of the board after Acharya highlighted the issues concerning the independence of the central bank.

There have been reports that the Finance Ministry has started discussion with the RBI under the never before used Section 7 of the RBI Act, which empowers the government to issue directions to the “lender of last resort”.

In 2017, former RBI Governor D Subbarao said Section 7 has never been used in more than 80 years of the central bank’s history, reported PTI.

In a statement Wednesday, the Finance Ministry said the RBI’s autonomy is “essential” and will be “nurtured”. People with direct knowledge of the matter said the Finance Ministry wrote three separate letters in the past few weeks to the RBI on issues ranging from prompt corrective action (PCA) framework to liquidity management and sought a consultation, well within the scope of Section 7 of the RBI Act.

In the last 30 days, the Centre is understood to have sent communications to the RBI on three issues allowing banks under prompt corrective action to lend to small businesses, issuing a special dispensation for loans in the power sector and to improve liquidity in the system. The stance of the government-appointed directors is likely to determine Patel’s future course of action, reported TOI.

Finance Minister Arun Jaitley and RBI governor Urjit Patel came face-to-face at a meeting of a financial stability body amid tension after Mr Patel’s deputy made a strong call for autonomy for the central bank in a speech on Friday.

Urjit Patel, who was appointed for a three-year term, was the first governor of the RBI to be chosen by PM Modi. Before joining the RBI, Urjit Patel was an adviser with The Boston Consulting Group.

(With inputs from Agencies)