RBI chief draws veil over rift with Modi government

By Suvashree Choudhury and Swati Bhat

MUMBAI (Reuters) - The Reserve Bank of India chief on Wednesday drew a veil over a public spat with the government, refusing to answer questions on a matter which had raised concerns that the central bank's independence could be undermined.

Announcing policymakers' decision to leave the central bank's interest rates unchanged for now, Governor Urjit Patel made clear he would not be drawn on a controversy that first blew up in October.

"I already said that I would avoid those questions because we're here discussing the monetary policy committee resolution," he told reporters at a press conference.

Patel's reluctance to broach the subject was fairly typical for a central banker regarded as naturally reticent. Making his first media appearance since the row erupted, Patel brushed off questions from two reporters.

"Is this related to the monetary policy committee resolution? I don't think so. We're here to discuss the monetary policy committee resolution and the macro economy," Patel responded the second time he was pressed to comment.

The disagreements with Prime Minister Narendra Modi's government do not involve monetary policy. Indeed, three of the six members of the MPC, chaired by Patel, are government nominees, and the decision to keep interest rates where they are was unanimous.

However, the RBI also announced it would be lowering bank's mandatory bond holdings, known as the statutory liquidity ratio (SLR), from the start of next year to persuade banks to lend more rather than park case in safe-haven government securities.

The government has put the RBI under intense pressure o ease lending rules, infuse more liquidity and allow easier capital norms for banks to boost economic growth ahead of general elections due by May.

Also, the government has been asking the RBI to pay a higher dividend from its reserves to help fund the fiscal deficit. The government side has argued that the central bank's surplus funds are higher than needed, but the RBI has resisted, saying that the funds provided insurance against sharp market turbulence.

The row erupted in public in late October, when a deputy governor warned that undermining central bank independence could be "catastrophic". As the war of words with government officials worsened there was speculation that Patel might resign, though he has not publicly commented on the issue.

While a temporary truce was arrived at a 18-member central bank board meeting on Nov. 19 which included government officials and its nominees, tensions could resurface when it gathers next week as the Modi government is keen for further reduced lending curbs and governance changes at the RBI.

"The RBI's autonomy is very important. Central bank independence is pivotal to modern ideas about best practice for monetary policy," said Shilan Shah, senior India economist at Capital Economics in Singapore.

"Independence allows a central bank to focus on achieving its mandate (typically low inflation) even if doing so is not politically expedient - for example, causing growth to slow in the run-up to an election. As a result, inflation expectations are well anchored and the effectiveness of monetary policy is enhance."

(Additional reporting by Abhirup Roy; Editing by Simon Cameron-Moore)