* Cbank autonomy essential, accepted governance requirement- govt
* India govt to continue consultations, suggest solutions -govt
* RBI Governor may consider resigning - TV
* Govt invokes rare power to issue directions to RBI -report
* Bonds, rupee weaken after reports that RBI governor mayquit (Adds comments from ruling party, describes section 7 of RBIAct, updated markets closing)By Manoj Kumar and Suvashree ChoudhuryNEW DELHI/MUMBAI, Oct 31 (Reuters) - India's governmentaffirmed its belief in central bank autonomy on Wednesday,calling it "essential" in a bid to calm investors worried by aheated public row with the Reserve Bank of India.Indian stocks and bonds fell and the rupee weakened earlierin the day amid reports that RBI Governor Urjit Patel mayconsider resigning given the breakdown in relations.The media reports also said the government had invokednever-before-used powers to issue directions to the central bankgovernor on matters "of public interest", related to support forthe financial sector and small companies.In a statement issued hours later through the financeministry, the government said the RBI's independence was "anessential and accepted governance requirement".The government added that it would continue to carry outextensive consultations with the central bank to give itsassessments on issues and suggest possible solutions.But it was unclear if it had used powers for the first timeunder the RBI Act to give the bank instructions. The EconomicTimes newspaper reported the government had sent letters toPatel in recent weeks exercising those powers.Indian television channels CNBC-TV18 and ET Now both ranreports earlier in the day citing unnamed sources saying Patelmight resign. The RBI declined to comment.The government's statement, however, struck a calmer tone,according to analysts."The statement is ambiguous and does not fully clarify theissues at hand," said A. Prasanna, chief economist at ICICISecurities Primary Dealership in Mumbai."Still it does sound like the finance ministry is trying todial down the temperature."The Economic Times report said that powers under Section 7of the RBI Act had been invoked on issues ranging from providingliquidity for non-bank finance companies, to capitalrequirements for weak banks and lending to small- andmedium-sized companies.
TENSIONS BALLOONIndian markets clawed back some early losses after thestatement.Benchmark stock indexes Sensex and Niftyboth closed up more than 1.5 percent, while the rupee ended at 73.95 to the dollar, up from a session low of 74.14 butstill weaker than its previous close of 73.68.The 10-year benchmark bond yield closed 2basis points higher at 7.85 percent.Tensions between the RBI and the government escalated afterRBI Deputy Governor Viral Acharya said on Friday thatundermining central bank independence could be "potentiallycatastrophic", indicating the authority was pushing back againstgovernment pressure to relax its policies and reduce its powersahead of a general election due by May. Investors are worried that a prolonged row between thegovernment and the RBI could impact decision-making at a timewhen the world's sixth largest economy needs a steady hand.India's financial markets have been hit hard by a series ofdebt defaults by one of the largest infrastructure fundingcompanies. That has led to a liquidity crunch in the entirenon-banking finance sector."We have a fairly fragile financial system, between thepublic sector banks and non-banking financial companies," saidDhananjay Sinha, head of institutional research at Emkay GlobalFinancial Services."If RBI's top brass exits, there is a likelihood ofinstability that will be perceived, and that can have an impacton the economy and the market at large."
IN THE OPENAcharya's speech came after a long-running spat between thegovernment and the RBI over whether the central bank should partwith some of its 3.6 trillion rupees ($48.73 billion) ofreserves to help fund the country's fiscal deficit.Government officials have also called for the RBI to relaxstrict lending rules for weak banks and are trying to trim theRBI's regulatory powers by setting up a new payment regulator.Finance Minister Arun Jaitley on Tuesday blamed the centralbank for failing to stop a lending spree during 2008-2014 thatleft banks with $150 billion of bad debt. "Ultimately the elected government is supreme, it hasaccountability," said Gopal Krishna Agarwal, a spokesman forPrime Minister Narendra Modi's ruling party who is also adirector in the state-run Bank of Baroda . "Aninstitution's independence does not mean that they are supreme."Patel and his deputy governors are expected to meet topfinance ministry officials on Friday. TV channels said Patel hascalled for a full RBI board meeting on Nov. 19, though thecentral bank has not confirmed that. (Additional reporting by Tanvi Mehta, Chris Thomas and KrishnaN. Das; Editing by Gopakumar Warrier, Neil Fullick & SimonCameron-Moore)
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