RBI governor Urjit Patel could resign on November 19

Sovereign Bonds

In recent weeks, the rift between the RBI and the government has been widening over various issues.

In his interview with the news channel, the former Governor described RBI as a "seat belt", which would save the "driver" - the government - if an accident occurs.

The RBI, however, is opposed to this view and believes that the government's request for transfer surplus can adversely impact macroeconomic stability, The Indian Express reported. They pertain to transfer of surplus funds, easing of NPA norms to kick start lending and support growth, and easing liquidity crisis facing non-banking finance companies (NBFCs), sources had said.

Still, the government sources say they will find ways to increase pressure on the RBI and Patel via the board before moving to invoke Section 7. "Protect the nation", he tweeted and also posted the report.

If the government dips into the RBI's capital, it will not create any new government revenue and using the reserves maintained by the RBI will erode the market's confidence in the government's commitment to deal with the fiscal deficit and inflation issues.

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"We don't know whether the board will supersede the RBI in that case", said the source.

The differences between the government and the central bank became public after RBI Deputy Governor Viral Acharya said the government should not interfere with the central bank's autonomy.

In a statement last week, the ministry said the RBI's autonomy is "essential" and will be "nurtured".

The government recently called for the RBI to relax its lending restrictions on some banks, and Centre has also been trying to trim the RBI's regulatory powers by setting up a new regulator for the country's payments system. He had also said how a transfer of excess reserves from a central bank to the government can be "catastrophic" and may ignite "economic fire".

"Governments that do not respect central bank independence will sooner or later incur the wrath of financial markets, ignite economic fire, and come to rue the day they undermined an important regulatory institution; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of worldwide investors, and longer life spans", Acharya had said. Additionally, at about 28%, the government feels that the RBI holds higher total capital as a percentage of its total assets when compared to other global central banks.

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