The Reserve Bank of India governor Urjit Patel is considering all options including resigning from his post following an unprecedented attack on the central bank's functioning by Finance Minister Arun Jaitley.
The court observed that if the RBI and the government are at variance on any policy or regulatory issue, the latter should "consider whether the circumstances warrant the initiative of the consultation process" under Section 7 of the RBI Act.
The Indian rupee slid on speculation that the rift between the government and central bank is widening. But at the same time, there is an unmistakable sense of displeasure and warning from the government when it says that it frequently consults with RBI on important matters but never goes public with these matters.
Sources within the government and the RBI said that, over the last few months, the two sides had held discussions on various issues, including easing of norms under the prompt corrective action framework for weaker banks. I don't know what the central bank was doing.
Asking the government to stop arm-twisting the central bank, the letter said both should talk and sort out the issues, instead of trying to ride roughshod over RBI and warned that "what they (government) are trying is at the expense of the nation".
Acharya's comments gave an indication that the central bank is pushing back hard against government pressure to relax its policies and reduce its powers ahead of a general election due by next May. Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs. Economic Affairs Secretary Subhash Chandra Garg declined to comment, while Finance Secretary Hasmukh Adhia said it was for the Department of Economic Affairs to clarify on Section 7 of the law. The directions reportedly come on the matters related to the public. The RBI also opposed a suggestion by the government's inter-ministerial committee to set up an independent regulator for payment systems.
There is an "irreversible breakdown between RBI governor and the government", one of the source added. While there are reports suggesting that the Centre has already invoked Section 7 of RBI Act, it still remains unclear on how it will be used.
Unlike in the past, all four RBI deputy governors attended the FSDC meeting along with Dr. Patel.
Patel had come under increasing criticism from the banking industry as well as the government over his handling of non-performing assets (NPAs) and his stance on the autonomy of the RBI. 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.