Indian government set to turn up heat on central bank governor-sources
* Government supporters to press RBI at board meeting onNov. 19
* Government wants its economic priorities to be accepted byRBI
* Govt officials prepared to risk RBI governor'sdeparture-sources
* If Patel departs it is likely to roil financialmarkets-traders
* Struggle will be a test of the powers of the RBIboard-sources
By Manoj Kumar and Suvashree Choudhury
NEW DELHI/MUMBAI, Nov 6 (Reuters) - The Indian governmentintends to keep pressing demands for the country's central bankto relax lending curbs and hand over surplus reserves even if itrisks provoking a resignation by the bank's governor, threesources familiar with the government's thinking told Reuters.
While there appeared to be a partial truce last week whenthe government said it respected the autonomy of the ReserveBank of India (RBI), the sources said the government will turnup the heat at the bank's central board of directors meeting onNov. 19.
And RBI Governor Urjit Patel will be a key focus of thepressure from a group of directors who support the government'sposition, according to the New Delhi-based sources, who declinedto be named due to the sensitivity of the matter.
"We want the RBI governor to accept the priorities of theeconomy and to discuss these with board members," said one ofthe sources, a senior government official with direct knowledgeof deliberations. "If he wants to take decisions unilaterally,it will be better for him to quit."
Investors and traders warn that if Patel quits it willcreate uncertainty and undermine India's already-weak financialmarkets. They have been hurt in recent weeks because of defaultsby a major financing company.
A Finance Ministry spokesman declined to comment for thisstory. The RBI did not respond to an email seeking comment.
"POTENTIALLY CATASTROPHIC"
Tensions between the two sides came to the fore last monthwhen RBI Deputy Governor Viral Acharya gave a speech that blewthe lid off a fractious dispute between the bank and thegovernment of Prime Minister Narendra Modi on issues rangingfrom lending curbs to who controls the institution's reserves. Acharya said that undermining central bank independencecould be "potentially catastrophic", and he even cited meddlingby the Argentine government in the affairs of its central bankin 2010 - prompting big drops in that nation's financial markets- as a sign of how bad things can get.
For its part, government officials say they have beenincreasingly frustrated by the intransigence of Patel and histeam to address its demands and engage in constructive dialogue.
The RBI has consistently pushed back against calls from thegovernment to hand over more money from its reserves to help fund the fiscal deficit.
The ruling Hindu nationalist Bharatiya Janata Party is alsokeen to reduce curbs on the shadow banking sector and increaseoverall lending to small and medium-sized businesses. The aim isto help offset economic headwinds from low farm prices and highfuel prices ahead of a general election due by next May and keystate elections in a few weeks.
"We will do everything to protect the interests of theeconomy," one of the members of the RBI central board toldReuters, noting the governor and his team would have to"explain, defend and justify" their decisions at the boardmeeting.
It is unclear, though, how the government will seek to exertpressure through the RBI's Central Board as the body is alargely symbolic one, which has never had a direct say in thebank's directives and policies, according to two additionalsources with knowledge of the law under which the central bankoperates.
"The role of the board has typically been to supervise theworkings of the RBI, like internal audit and recruitment. Butthe RBI is not really accountable to the board for regulatoryand operational issues," said one of the sources, saying thiswould only change if the government invokes Section 7 of the RBIAct allowing it to dictate policy to the central bank.
"We don't know whether the board will supersede the RBI inthat case," said the source. "This kind of situation has neverarisen before."
Still, the government sources say they will find ways toincrease pressure on the RBI and Patel via the board beforemoving to invoke Section 7.
"Patel and his team must recognise the period of aninvisible RBI board is over," one of the New Delhi-based sourcessaid, noting that the RBI will sooner or later have to fall inline.
Patel's predecessor Raghuram Rajan defended the RBI's callfor autonomy saying that the central bank's responsibility is tosecure financial stability and it has the right to say "no" to
government proposals that could lead to instability.
"The RBI is something like a seatbelt," Rajan, who is aprofessor at the University of Chicago Booth School of Business,told CNBC-TV18.
"As a driver, being the government, it has the possibilityof not putting on the seatbelt, but of course, if you don't puton the seatbelt, you can get into an accident which can be quitesevere."
N.R. Bhanumurthy, an economist at the National Institute ofPublic Finance and Policy, a New Delhi-based think tank, partlyfunded by the finance ministry said the RBI and the governmentwere dealing with the same problem though there was a differenceof opinion on how to solve it.
"While the government is looking for short-term solutions,the RBI is focused on long term solutions," he said, adding thatdespite disagreements, both could resolve their differences.
"If the RBI governor is forced to resign, it will be a hugesetback for the economy."
(Reporting by Manoj Kumar in New Delhi and Suvashree Choudhuryin MumbaiEditing by Martin Howell & Simon Cameron-Moore)
euan.rocha.reuters.com@reuters.net)) Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.  |