Central Bank of India at war with its government

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Central Bank of India at war with its government

Last week, a senior official of India’s central bank fired what appeared to be an explosive broadside at attempts being made to undermine the regulator’s independence.

The Deputy Governor of the Reserve Bank of India told a meeting that, “Governments that do not respect central bank independence will sooner or later incur the wrath of the financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution,” 

Days after this uncharacteristic outburst, there were reports that the government was planning to exercise never-before-used powers that would allow it to give “directions” required in the “public interest” to the bank. Rumours swirled on Wednesday that Urjit Patel, the 54-year-old bank chief, and a Yale-educated economist, would resign. Mr. Patel have scheduled a meeting with the bank board for 19 November.

A conflict between Narendra Modi’s BJP-led government and India’s central bank had been brewing for some time.

The government reportedly wants the RBI to allow ailing state-owned banks, groaning under dud loans to industries, to resume lending to small businesses. It also wants the regulator to lower interest rates to inject much-needed liquidity into the economy.

The two have also differed over government plans to set up a separate regulator to look after digital payments. In the past few months, the government has appointed a controversial right-wing accountant to the central bank board and cut short the tenure of another board member, apparently on the grounds of conflict of interest. Finance Minister Arun Jaitley stirred the pot recently when he accused the central bank of “looking the other way” while banks were lending indiscriminately some years ago.

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