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"Government is very upset" as rift with RBI made public

Tuesday October 30, 2018 11:31 AM, & Agencies

RBI Govt Rift

New Delhi: Officials with the Prime Minister Narendra Modi's office in New Delhi are "very upset" with the Reserve Bank of India (RBI) for publicly talking about a rift with the government, fearing it could tarnish the country’s image among investors, news agency Reuters reported Monday.

Talking to Reuters, one official said that it was vital that what happened between the government in New Delhi and the RBI in Mumbai was kept confidential. “The government respects the autonomy and independence of the RBI but they must understand their responsibility,” the official said.

A second official, based in Indian Prime Minister Narendra Modi’s office, said it was “very unfortunate” that the RBI took the matters public. “The government is very upset. It was not expected from the RBI,” the official added.

The comments came after Reserve Bank of India (RBI) Deputy Governor Viral Acharya on Friday warned that undermining the central bank’s independence could be “potentially catastrophic”, in an indication that it is pushing back hard against government pressure to relax its policies and reduce its powers.

In a speech to top industrialists Acharya cited the Argentine government’s meddling in its central bank’s affairs in 2010 as an example of what can go wrong. That led to a surge in bond yields that badly hurt the South American economy.

“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,” Acharya said.

The All India Reserve Bank Employees Association, on the other hand, has sided with RBI No 2, saying, "undermining the country's central bank was a recipe for disaster which the government must desist".

"Let the two talk and sort out the issues instead of the government trying to ride roughshod over the RBI, what they are trying at the expense of the nation," the association said in a statement released on Monday.

The rift between the two started after the government demanded that RBI eases its lending restrictions on banks that have a low capital base and a massive rise in bad debts. Another contentious issue is the control over interest rates. While the RBI wants sole authority over raising or lowering the interest rates, the government is unhappy over its decisions.

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