NEW DELHI / MUMBAI (Reuters) – The Indian government on Wednesday emphasized that Reserve Bank of India (RBI) autonomy is "substantial" as it should reassure investors worried about a growing public dispute with the central bank ,
FILE PHOTO: Reserve Bank of India (RBI) Governor Urjit Patel attends a press conference following the bimonthly monetary review in Mumbai, India, on 6 December 2017. REUTERS / Shailesh Andrade / File Photo
Indian stocks and bonds fell and the rupee weakened earlier in the day when reports said that RBI governor Urjit Patel might consider resigning in the face of the breakdown in relations.
The media reports also state that the government has exercised powers never before used to give instructions to the central bank governor in matters of public interest.
In a statement issued hours later by the Ministry of Finance, the government said RBI's independence was "an essential and accepted governance requirement."
The government added that it would continue to conduct extensive consultations with the central bank to assess its problems and suggest possible solutions.
However, it was unclear whether he had used powers to issue the bank instructions for the first time under the RBI Act. The Economic Times reported that the government had sent letters to Patel in recent weeks to exercise these powers.
Indian television channels CNBC-TV 18 and ET Now reported on a previous day that Patel could resign. The RBI declined to comment.
"The statement is ambiguous and does not fully clarify the issues ahead," said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai.
"It still sounds like the Ministry of Finance is lowering the temperature."
The Economic Times states that the powers of Section 7 have been used in relation to issues ranging from liquidity for non-bank financial firms to capital requirements for weak banks and lending to small and medium-sized enterprises.
The Indian markets had made up for some of the early losses after the announcement but were still tentative.
The benchmark stock indices BSE and NSE BSESEN.NSEI rose about 1 percent, while the rupee INR = D4 was 73.85 against the dollar, against a low of 74.14 but still during the day.
The 10-year benchmark bond yield IN071728G = CC was 7.87 percent from the previous closing price of 7.83 percent.
The tensions between the RBI and the government increased after the RBI Deputy Governor Viral Acharya said on Friday that the deterioration of central bank independence could be "potentially catastrophic," suggesting that the agency was opposed to pressure from the Fed Government has urged to relax its policies and reduce its powers to a general election due by May.
Investors are concerned that a persistent dispute between the government and RBI could influence decision-making as India's financial markets were hit hard by a series of defaults by one of the largest infrastructure finance companies. This has led to a liquidity crisis throughout the non-banking sector.
"We have a rather weak financial system between public banks and non-bank financial companies," said Dhananjay Sinha, head of institutional research at Emkay Global Financial Services.
"If the RBI leaders emerge from brass, there is a likelihood of instability being perceived, and this can affect the economy and the entire market."
The $ 2.6 trillion Indian economy outperformed the French economy in 2017 to become the sixth largest in the world and, according to the World Bank, is not far behind that of the United Kingdom.
Acharya's speech came after a long-running dispute between the government and RBI over whether the central bank should divest itself of its 3.6 trillion rupees ($ 48.73 billion) in order to help finance the country's budget deficit ,
Government officials also urged RBI to ease the stringent credit rules for weak banks and seek to curtail RBI's regulatory powers by establishing a new payment regulator.
Finance Minister Arun Jaitley accused the central bank on Tuesday that it had not stopped a credit crunch in the period 2008-2014, leaving banks with $ 150 billion in debt.
Patel and his deputy governors are expected to meet on Friday with senior officials from the Treasury. According to TV channels, Patel called for a full meeting of the RBI board on November 19th.
Additional coverage by Tanvi Mehta and Chris Thomas in Bengaluru; Editing by Gopakumar Warrier and Neil Fullick