RBI Looked the Other Way When Banks Gave Loans Indiscriminately, Says Arun Jaitley as Rift Widens

New Delhi: Union finance minister Arun Jaitley criticised the Reserve Bank of India (RBI) for failing to prevent lending excess in a speech on Tuesday.

"The central bank looked the other way when banks gave loans indiscriminately during 2008 to 2014," Jaitley said while speaking at an event in New Delhi.

Tensions between the finance ministry and the RBI have risen since the bank's deputy governor said in a speech on Friday that undermining a central bank's independence could be "potentially catastrophic", in an indication that it is pushing back hard against government pressure to relax its policies and reduce its powers.

Government officials are reportedly upset with RBI deputy governor Viral Acharya for publicly talking about the rift with the government.

In a speech to top industrialists, Acharya cited the Argentine government's meddling in its central bank's affairs in 2010 as an example of what can go wrong. That led to a surge in bond yields that badly hurt the South American economy.

"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," Acharya had said.

The government officials Reuters spoke to on Monday declined to be identified because of the sensitivity of the subject.

One said that it was vital that what happened between the government in New Delhi and the RBI in Mumbai was kept confidential. "The government respects the autonomy and independence of the RBI but they must understand their responsibility," the official said.

A second official, based in Prime Minister Narendra Modi's office, said it was "very unfortunate" that the RBI took the matters public. "The government is very upset. It was not expected from the RBI," the official added.

An RBI spokesman was not immediately available for comments after business hours.

Government officials have recently called for the RBI to relax its lending restrictions on some banks, and New Delhi has also been trying to trim the RBI's regulatory powers by setting up a new regulator for the country's payments system.

The Modi administration has also been pushing the central bank to part with some of its Rs 3.6 trillion rupees surplus to help bridge the fiscal deficit and finance its welfare programmes.