RBI governor Urjit Patel could resign on November 19

Representative Image

Representative Image

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.

On reports that the government might have imposed Section 7 of the RBI Act curtailing its autonomy, he said it is unlikely that any such step has been taken, suggesting that both the government and the RBI should respect each other's motivation and thoughts.

Citing Section 7 of the RBI Act - an unprecedented move in the 80-year history of RBI - the government wants RBI Governor Urjit Patel to address three prime concerns.

"We will do everything to protect the interests of the economy", one of the members of the RBI central board told Reuters, noting the governor and his team would have to "explain, defend and justify" their decisions at the board meeting.

Sources have also claimed that the ministry has proposed that from 2017-18, the RBI, after taking into account its capital requirement should transfer the entire surplus to the government - a point of contention between the two bodies. The central bank, however, feels that it needs to retain a share of profits to make its balance sheet stronger, as per media reports.

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.

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 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.

"We don't know whether the board will supersede the RBI in that case", said the source. The last meeting of the board was held in October.

Acharya said that undermining central bank independence could be "potentially catastrophic", and he even cited meddling by the Argentine government in the affairs of its central bank in 2010 - prompting big drops in that nation's financial markets - as a sign of how bad things can get. It also felt that the central bank has been sometimes "arbitrary" when it came to the transfer of the transfer of the interim surplus.

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