"The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions", he said.
Needless to say, the government stands to benefit politically from the desired virtuous cycle as it goes into next general elections. In one hand it is criticising RBI for NPAs and on the other accusing it of a liquidity squeeze.
Adding to the row, Finance Minister Arun Jaitley blamed the central bank for failing to stop a lending spree during 2008-2014 that left banks with $150 billion of bad debt. The government believes that easing restrictions will boost lending and increase growth. This was seen as a veiled reference to RBI pushing back hard against government pressure to relax its policies and reduce its powers. This independence, he said, was necessary to secure greater financial and macroeconomic stability.
The government wants the RBI to dilute PCA guidelines so that these banks could lend to NBFCs.
The rift between the RBI and the Modi government turned ugly after Patel's deputy, Viral Acharya, said last week that attempts to undermine the central bank's autonomy could prove be 'potentially catastrophic'.
Mumbai: The rupee pared losses against the USA dollar on Wednesday after the government said that it respects the Reserve Bank of India's autonomy.
"This complex interplay of the sovereign's exercise of its powers, the central banker's exit, and the market's revolt, will be at the center of my remarks today on why it is important for a well-functioning economy to have an independent central bank, i.e., a central bank that is independent from the executive branch of the government". In a statement, the finance ministry said such consultations with RBI or Reserve Bank of India took place from time to time "in public interest"."The government has never made public the subject matter of those consultations". On Wednesday, reports suggested that the government had floated the idea of invoking Section 7 of the RBI Act, which would allow it to give instructions to the central bank, albeit "in consultation with the Governor". "Only the final decisions taken are communicated", said the ministry.
However, another report suggested that the government has initiated a consultative process with the RBI in three areas of concern and while doing so, has mentioned Section 7 without actually invoking it. "The government will continue to do so".
Slamming the government for citing a never-used clause of the RBI Act, former Union finance minister P Chidambaram on Wednesday alleged that the BJP dispensation is "hiding facts" about the economy and is "desperate".
According to Livemint, the government is unlikely to invoke Section 7 of the Reserve Bank of India Act though it is using it as a threat to get the central bank to the negotiating table on a host of issues, including the more recent liquidity crisis that has impacted non-banking finance companies.