RBI vs Govt: Arun Jaitley meets Urjit Patel as rift widens

New Delhi, Oct 30: Finance Minister Arun Jaitley met RBI governor Urjit Patel on Tuesday as tension mounted over the Reserve Bank of India's push for more independence.

Finance Minister Arun Jaitley held a regular meeting of the Financial Stability and Development Council -- a high-level panel of financial market regulators -- which Governor Urjit Patel and his deputies attended.

There have been differences between the government and the RBI over regulation of state-owned banks and handling of non-performing loans, with the central bank repeatedly raising concerns about lack of power to oversee PSU banks. Meanwhile, the government has maintained that RBI has sufficient powers to regulate both private and PSU banks.

The RBI has already warned the government of "potentially catastrophic" consequences if it keeps meddling in its affairs. "Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite (an) economic fire, and come to rue the day they undermined an important regulatory institution," Viral Acharya, deputy governor of the RBI, said at an event in Mumbai on Oct. 26.

Not surprisingly, the government is reportedly very distressed by these public comments. There are fears that the simmering tension has sparked an unprecedented crisis that may spook the stock and currency markets.