Government set to turn up heat on RBI governor

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"We want the RBI governor to accept the priorities of the economy and to discuss these with board members", said one of the sources, a senior government official with direct knowledge of deliberations. According to recent reports, Patel had threatened to resign following serious differences with the central government.

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.

These issues may figure during the RBI's board meeting on November 19.

He also noted in his address to top industrialists that the Argentine government's meddling in its central bank's affairs in 2010 led to a market revolt and a surge in bond yields. The central bank, however, feels that it needs to retain a share of profits to make its balance sheet stronger, as per media reports.

In its attempt to clean up the banking system, the RBI introduced Prompt Corrective Action (PCA) framework that places curbs on lending, expanding branch network and dividend distribution on weak banks.

The government wants some of these strictures to be eased to kick start lending and support growth, the sources said.

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

Last month, RBI Deputy Governor Viral Acharya had said that undermining the central bank's independence would be "potentially catastrophic".

However, the RBI is not a department of the Finance Ministry and if the government does invoke section 7, maybe it should also state beforehand that any consequences of its directive will be the responsibility of the government and not the RBI.

On November 6, former RBI governor Raghuram Rajan, in an interview with CNBC TV18, while defending the call for RBI's greater autonomy said that the nation is ultimately going to benefit from a robust and independent RBI. The central bank is of the view that the use of its reserves will hurt the government's commitment to fiscal prudence.

"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", Rajan added.

Two of the contentious issues behind the ongoing spat between the government and the central bank which of late has reached historic lows, has been North Block's call for addressing the liquidity crunch.

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