RBI responsible for NPA crisis, Jaitley makes spat more public

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Quoting a source, the report said that there has been an "irreversible breakdown between the RBI governor and the government".

Earlier, pitching for "effective independence", RBI Deputy Governor Viral Acharya on Friday said governments that do not respect central bank's independence would sooner or later incur the wrath of financial markets.

The statement said the government has never made public the subject matter of those consultations.

He said the RBI's autonomy would be strengthened by having regulatory control over state-run banks. Second letter was on using RBI's capital reserves and the third letter was on relaxing constraints on PCA banks for loans to SMEs.

Sources within the government and the RBI said that, over the last few months, the two sides had held discussions on various issues, including easing of norms under the prompt corrective action framework for weaker banks. "Even the RBI board is being sought to be stuffed in a particular direction, which would prompt the discerning people to look askance and make it hard for RBI to frame policies", the union said in the letter.

He added, "We did not invoke Section 7 in 1991 or 1997 or 2008 or 2013". Arguing against the Centre's proposal, the RBI had said, "The digital payments have made good and steady progress".

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Even thought the controversy around spat between the government and the RBI has been doing rounds for a couple of days now, speculations over RBI governor Urjit Patel's resignations hit the headlines on Wednesday morning.

Voicing support for Patel, Bharatiya Janata Party (BJP) leader and Rajya Sabha MP Subramanian Swamy on Wednesday said if the governor decides to leave, the blame would fall on Jaitley. However, they added, there has been no talk of invoking Section 7 (1). The issues which were called upon by the Centre were reportedly in public interest.

There have also been media reports that the government has invoked never-before-used powers under the RBI Act that allow it to issue directions to the central bank governor on matters of public interest.

With the war between the Narendra Modi-led NDA government and the Reserve Bank of India (RBI) escalating, there is apprehension that the government may invoke Section 7 of the RBI Act.

Patel had come under increasing criticism from the banking industry as well as the government over his handling of non-performing assets (NPAs) and his stance on the autonomy of the RBI.

"The political dysfunction is yet further excuse for foreigners to head for the hills, sustaining pressure on INR", said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong. According to ET Now, Patel had told government not to "raid RBI reserves", as government was keen on the transfer of reserves to fill up its fiscal deficit amid NPA stress.