Rupee Drops on Speculation of Worsening RBI-Government Tension

(Bloomberg) -- The Indian rupee slid on speculation that the rift between the government and central bank is widening.

The currency fell as much as 0.5 percent to 74.0575 per dollar on Wednesday, after the Economic Times reported that the government invoked a rarely-used power to direct the central bank on matters of public interest. An official from the Finance Ministry, who declined to be named in line with department rules, said the Section 7 power in the Reserve Bank of India Act hadn’t been invoked.

The RBI under Patel has been pushing for more powers to clean up a banking system that’s saddled with bad debts. Yet, with elections looming later this year and next, Prime Minister Narendra Modi’s government is keen to ensure lenders extend credit as rising oil prices and a currency slump hurt Asia’s third-largest economy.

“The political dysfunction is yet further excuse for foreigners to head for the hills, sustaining pressure on INR,” said Sue Trinh, head of Asia foreign-exchange strategy at Royal Bank of Canada in Hong Kong.

Yields on the benchmark 10-year bond rose as much as 6 basis points to 7.89 percent. The rupee was last trading 0.5 percent weaker at 74.0575.

CNBC-TV18 said all options are on the table for Reserve Bank of India Governor Urjit Patel, citing people it didn’t identify.

RBI Autonomy

The latest development follows a Friday speech by Deputy Governor Viral Acharya warning of the risks of political leaders encroaching on the central bank’s independence. He said the RBI’s autonomy would be strengthened by having regulatory control over state-run banks.

While Finance Minister Arun Jaitley met Patel on Tuesday at a scheduled meeting, there was no discussion about the rift, according to an official who asked not to be identified citing rules.

The Economic Times said the government invoked powers under Section 7 of the RBI Act by sending several letters to Governor Urjit Patel in recent weeks on issues related to liquidity for non-banking finance firms, capital for weak banks and lending to SMEs. The newspaper didn’t say where it got the information. Another report in the Times of India said the government had mentioned the rule to the RBI in consultations, without invoking it.

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