Show some grace to resolve tiff, market veterans tell govt & RBI

NEW DELHI: As rumours about RBI Governor Urjit Patel considering resignation did the rounds amid reports that the government may invoke Section 7 of RBI Act, financial markets were nervous on Wednesday.Equity benchmark Nifty50 hit a low of 10,105 in morning trade on Wednesday, before recovering some ground. The rupee hovered around its two-week low level.In a statement issued on Wednesday, the government said it gives views and suggestions to RBI from time to time and will continue to do so in public interest. The statement also said the government respects and nurtures RBI's autonomy.Section 7 of the RBI Act gives the Centre powers to give directions to the central bank from time to time in public interest after consultation with the RBI governor. It is seen as an instrument of last resort, when the government can issue direct orders to the central bank to carry out its wishes.The section involves two stages: Consultation and instruction.Sources told ETNOW that the government has not yet resorted to Section 7 of RBI Act to transfer funds, but noted that it has send letters of consultation with RBI regarding various issues, including liquidity for NBFCs, capital requirement for weak banks and lending to SMEs.“There have been differences of opinion between RBI and the government, but those were managed behind closed door. Clearly, we need magnanimity from both sides. There will always be difference of opinion. If we look at the US economy, President Donald Trump has been going berserk about Fed Chair Jerome Powell about how he is raising interest rates earlier than necessary. But these matters are better resolved through consultation behind closed door, instead of bringing them out in the open,” said Nilesh Shah, MD of Kotak Mutual Fund. Shah said the market is discounting whatever is in the public domain, but believes a lot would depend on how events pan out.It is quite possible that like in the past RBI and the government will sit across the table and resolve their differences, he said.In that case, the market has no reasons to be nervous. A reverse could also happen. There will be reasons for the markets to be nervous. “This is a binary event. We just hope and pray that it would get settled like it has always been settled in the past,” Shah told ET NOW.The widening rift between RBI and the government came to light when Deputy Governor Viral Acharya raised the issues regarding the central bank’s independence last week.Acharya said risks of undermining the central bank’s independence are potentially catastrophic, a ‘self-goal’ of sorts, as it can trigger a crisis of confidence in capital markets that the government (and others in the economy) tap to manage their finances.In his remarks, Acharya said the government that does not respect the central bank’s independence will sooner or later incur the wrath of the financial markets, ignite economic fire and come to rue the day it undermined an important regulatory institution.“Their wiser counterparts, who invest in central bank independence, will enjoy lower costs of borrowing, the love of international investors and longer life spans,” he said.“I doubt if anybody perhaps has even gone into RBI’s balance sheet. It is a very complex balance sheet. To argue about what kind of surplus and transfers are available, one should not bring these issues to public domain. I am not a great fan of the political class. But remember, politics makes strange bedfellows. Jaitley is a very seasoned politician. He is likely to take nuanced stance. Urjit Patel is not known for being particularly gracious,” said Mythili Bhusnurmath, Consulting Editor, ET NOW.

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