Rising tensions between Centre and RBI: Here's what happened

The rift between the government and the Reserve Bank of India (RBI) and its Governor Urjit Patel, which has widened since the beginning of the year, has taken a turn for the worse.

Government sources told BTVI that Patel had come close to quitting at a recent meeting between the two parties.

Moneycontrol could not independently verify the report.

The Centre and the RBI have had disagreements over several issues and communication between them has been impaired as a result.

The differences resurfaced on October 26 when RBI Deputy Governor Viral Acharya hinted that the government's interference in the central bank's operations was rising and that there was a need for autonomy.

These reports have triggered questions over Patel's future at the central bank. There is speculation that he may not get an extension after his three-year term ends in September 2019.

According to a report by The Times of India, some members of the National Democratic Alliance (NDA) government have even said that "even Raghuram Rajan (Patel's predecessor who allegedly did not leave on good terms with the government) was better than this."

A few months ago, sources had told the newspaper, "After Rajan, it'll look bad if Patel is asked to go."

Points of disagreements

Acharya said that governments do not respect the independence of the RBI and that they will soon "incur the wrath of financial markets, ignite an economic fire and come to rue the day they undermined an important regulatory institution."

On October 27, Finance Minister Arun Jaitley said, "I think, for any regulatory mechanism, stakeholder consultation has to be of a very high quality, which will probably lead to a revisiting of traditional thoughts and opinions. And that’s why, when several regulators publish their approach papers or tentative drafts, they hold hearings, meet individuals, meet groups of stakeholders together and improve upon what is being said."

The Centre has been unhappy with RBI's decisions regarding interest rates. It also disagreed with RBI's February 12 directive on classification of non-performing assets (NPAs) and norms of loan restructuring, believing them to be harsh.

The government said that the directive would end up hurting state-run banks' profitability.

The Punjab National Bank (PNB)-Nirav Modi fraud, which surfaced at the beginning of the year, pushed the government to come down heavily on RBI for its supervision. Patel had immediately sought more powers to oversee public sector banks (PSBs) in order to bring them at par with private banks.

The government is insisting that RBI should intervene in the ongoing crisis at non-banking financial companies (NBFCs), which are facing a liquidity crunch following a series of defaults by infrastructure lender IL&FS.

The central bank is also unhappy with the way Nachiket Mor, a member of its Central Board, was removed from his position two years before his term was to end without being informed. This was seen as a retaliation to Mor's opposition to the Centre's demand for higher dividend.