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India central bank chief exit speculation fuels confusion

Rupee steadies but investors remain anxious over RBI independence

Speculation over Reserve Bank of India Gov. Urjit Patel's possible resignation has been sparked by critical letters from the Modi government to the central bank.   © Reuters

MUMBAI -- The head of the Reserve Bank of India has come under further political pressure after a key ally of Narenda Modi's ruling BJP party called on him to work with the government or quit.

The call by the Hindu nationalist group that is the parent of the BJP came after intense speculation in India over the future of Urjit Patel as RBI governor and rising concerns over the independence of the central bank.

Tensions between the RBI and the government have been mounting over long-running policy agreements. These spilled out last week when Viral Acharya, RBI deputy governor, said in a public lecture that "the risks of undermining the central bank's independence are potentially catastrophic, a self-goal of sorts [that] can trigger a crisis of confidence in the capital markets."

An official with the Hindu nationalist Rashtriya Swayamsevak Sangh organization said in an interview with Reuters that Patel should also "restrain his officials from making differences public."

Ashwani Mahajan, head of the RSS's economic wing, told Reuters: "If he doesn't follow discipline, it would be better for him to resign." Many of the members of the BJP came from the RSS and the organization retains a strong influence on the ruling party.

After falling on Wednesday, the rupee steadied on Thursday at around 73.8 per dollar. However, investors have been watching events closely. The RBI's highly respected technocratic management has also long been seen as a source of stability in India.

Should Patel resign, it would echo central bank chief Raghuram Rajan's exit in 2016. Rajan, who fought to ensure the transparency and independence of the RBI, did not resign but declined to seek a second term.

After local stations reported Patel might quit, the government issued a statement seeking to quell concerns over the RBI's independence.

"The autonomy for the central bank, within the framework of the RBI Act, is an essential and accepted governance requirement," the statement said. "Both the government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy."

The statement added that "extensive consultations" between the two sides were necessary at times, pushing back against any suggestion that Modi's government was encroaching on the bank's purview.

Research consultancy Capital Economics said New Delhi is treading on dangerous ground with moves that could put the RBI's independence at risk. A loss of credibility for the central bank could jeopardize its efforts to rein in inflation, a major policy success in India over the past few years.

Acharya's remarks are thought to be in response to strongly worded letters from the government to Patel on policy issues such as liquidity for nonbank financial companies, capital requirements for weak banks and lending to small and midsize businesses, according to media reports.

In writing these letters, New Delhi invoked for the first time Section 7 of the RBI Act -- the central bank's governing law, according to the Economic Times newspaper. This section authorizes the government to give directions to the bank, after consultation with the governor, if the government deems it necessary in the public interest.

Concerns over the bank's independence were also raised following the August appointment to the RBI board of a right-wing activist and economic commentator and critic of RBI policy who has supported Modi.

Adding to the pressure on the bank, Finance Minister Arun Jaitley, in a speech on Tuesday, blamed the RBI for "looking away" from unhealthy lending practices by banks between 2008 and 2014.

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