"The statement is ambiguous and does not fully clarify the issues at hand", said A. Prasanna, chief economist at ICICI Securities Primary Dealership in Mumbai.
In calling for the next board meeting, it appears that Patel may decide not to resign, as was speculated by a handful of media publications. These powers allow the government to issue directions to the central bank governor. "The central bank looked the other way, there was indiscriminate lending", he said.
He was delivering A.D. Shroff Memorial Lecture with theme, "Importance of Independent Regulatory Institutions - The Case of the Central Bank".
Needless to say, the government stands to benefit politically from the desired virtuous cycle as it goes into next general elections.
The Confederation of Indian Industry (CII) on Wednesday said that the financial sector is going through a phase of stress and put out a detailed paper with ten recommendations including seeking intervention from the banking regulator, Reserve Bank of India. According to reports, the Modi government had invoked Section 7 first time soon after Allahabad court's verdict in RBI versus Power companies.
Acharya's speech came after a long-running spat between the government and the RBI over whether the central bank should part with some of its 3.6 trillion rupees ($48.73 billion) of reserves to help fund the country's fiscal deficit. The following development surfaced a few days after the RBI deputy governor Viral Acharya, during a public address, said that the interference by the Centre in the working of the RBI could result in disastrous consequences.
The government statement on Wednesday although seemed like an attempt to douse the flames of disagreement between itself and RBI that pretty much happened due to its own doing.
In the current scenario of lack of liquidity, particularly of short term Commercial Papers, it is leading to a contagion effect, it said adding that the RBI is required to intervene in the interest of the entire financial sector.
The clarification comes amid reports said that the government has invoked Section 7 of the RBI Act that empowers the government to consult and direct the RBI to act on issues that it considers necessary in public interest. "The Government will continue to do so", the Finance Ministry stated. "The market can discipline the government not to erode central bank independence, and it can also make the government pay for its transgressions", he said. "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. "But it is quite worrisome to see the government trying to continuously interfere into the RBI's operations".
Patel and his deputy governors are expected to meet top finance ministry officials on Friday.