Rupee, bond prices fall as RBI-govt spat seen widening

Urjit Patel

While speculation abounded on Wednesday about whether the government had invoked Section 7 of the RBI Act, which would give the government the ability to direct the central bank's actions, the Finance Ministry remained studiously silent on the issue.

"Both government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy".

RBI Deputy Governor Acharya said that governments do not respect the independence of the RBI and that they will soon "incur the wrath of financial markets, ignite an economic fire and come to rue the day they undermined an important regulatory institution". What's interesting is that the following Section of the RBI Act has never been used by any government post the independence of India.

The finance ministry said consultations with RBI took place from time to time "in public interest". "There have been talks with the RBI on these issues, but invoking Section 7 (1) is something that has not come up yet but we need to also ensure that industries are not killed", he added.

BJP slammed Rahul Gandhi for his criticism against Prime Minister Narendra Modi over the RBI-Centre rift, and said that it reflects Congress party's grounding, "which is fast eroding in national politics".

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After RBI deputy governor Viral Acharya fired the first salvo, the central bank's employees union on Monday launched an attack against the central government. Experts and observers noted that before Patel, others, including Raghuram Rajan, Arvind Panagaria and Viral Acharya pointed at serious problems with the way this government approached economic policies and implementation.

Mumbai: The rupee pared losses against the USA dollar on Wednesday after the government said that it respects the Reserve Bank of India's autonomy. It added that the government holds extensive consultations with the RBI from time to time, during which is places its assessment on issues and suggests possible solutions, which is not disclosed to the public until a final decision has been taken.

The RBI under Patel has been pushing for more powers to clean up a banking system that's saddled with bad debts.

While Finance Minister Arun Jaitley met Patel on Tuesday at a scheduled meeting, there was no discussion about the rift, according to an official who asked not to be identified citing rules.

It said the government had sent letters to the RBI governor in recent weeks exercising powers under section 7 of the RBI Act on issues ranging from liquidity for non-bank finance companies, capital requirements for weak banks and lending to small- and medium-sized companies. According to ET Now, Patel had told government not to "raid RBI reserves", as government was keen on the transfer of reserves to fill up its fiscal deficit amid NPA stress.

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