Published: Wed, November 07, 2018
Finance | By Loren Pratt

Rahuram Rajan defends RBI deputy governor against Modi government's interference

Rahuram Rajan defends RBI deputy governor against Modi government's interference

His statement assumes significance amid recent signs of a rift between the government and the bank.

Reserve Bank of India (RBI) Governor Urjit Patel could resign at the central bank's next board meeting on November 19, online financial publication Moneylife reported on Wednesday, citing sources in touch with the governor.

However, The Indian Express, while citing sources said that the RBI has rejected the proposal stating that such a move could have an adverse effect on the macroeconomic stability and with low capital, RBI could end up losing its credibility. It has also opposed injecting more liquidity into the economy to avoid a tussle between housing and finance companies.

Sources have also claimed that the ministry has proposed that from 2017-18, the RBI, after taking into account its capital requirement should transfer the entire surplus to the government - a point of contention between the two bodies. "Protect the nation", he tweeted and also posted the report.

The RBI has locked horns with the government's demand for transferring a large chunk of its reserves to the Centre to keep the fiscal deficit in control.

In its attempt to clean up the banking system, the RBI introduced Prompt Corrective Action (PCA) framework that places curbs on lending, expanding branch network and dividend distribution on weak banks.

"We don't know whether the board will supersede the RBI in that case", said the source.

Last month, RBI deputy governor Viral Acharya said undermining a central bank's independence could be "potentially catastrophic", in comments appearing to push back against government pressure ahead of a general election next year. The last meeting of the board was held in October.

On November 6, former RBI governor Raghuram Rajan, in an interview with CNBC TV18, while defending the call for RBI's greater autonomy said that the nation is ultimately going to benefit from a robust and independent RBI.

After a civil war broke out in the CBI, the cage has reached another autonomous institution, RBI, wherein the standoff between the government and the central bank has traversed the headlines of the newspapers.

"Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of global investors, and longer life spans", Acharya had said.

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