Patel is unlikely to yield under pressure and will rather mount a strong defence of the central bank's policies regarding stringent NPA recognition norms as well as measures taken to ease credit supply to MSMEs.
The ongoing rift with the government is set to play out at the RBI's crucial board meeting Monday, with the Finance Ministry nominees and some independent directors expected to take on Governor Urjit Patel and his team over issues ranging from MSME credit to the central bank's reserves, though both sides are in favour of reaching a common ground.
The meeting has been called amid the growing tensions between the Centre and the Reserve Bank of India (RBI) after the Finance Ministry recently sought discussions under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI Governor.
RBI Deputy Governor Viral Acharya had in a speech last month talked about the independence of the central bank, arguing that any compromise could be "potentially catastrophic" for the economy.
Addressing the annual Economic Times awards function here on Saturday, Finance Minister Arun Jaitley said that growth must not be throttled by limiting credit availability and liquidity.
It is necessary that the growth process does not suffer due to the cleaning up of the banking system from the "collectively committed sins", he said, referring to the non-performing assets (NPAs), or bad loans, accumulated in the banking system and which have touched a staggering Rs 10 lakh crore.
"This will have to be done in a manner in which you restore the health of the banks, you restore the discipline as far as the banking system is concerned and at the same time, we don't end up throttling growth by throttling credit and liquidity in the market. That is a key issue," Jaitley said.
The RBI board is also expected to discuss issues related to making relaxations to its Prompt Corrective Action (PCA) framework to clean up the balance sheet of banks burdened with NPAs. Eleven of the 21 state-run banks are under the PCA framework.
The RBI's central board currently has 18 members, including Governor Urjit Patel and his four deputies as full-time official directors, while the rest have been nominated by the government, including the Economic Affairs and Financial Services Secretaries.
There has been a liquidity crunch in the economy, particularly among non-banking finance companies (NBFCs), following a series of defaults by the Infrastructure Leasing and Financial Services (IL&FS).
Though the central bank recently made some relaxations for the NBFCs and liberalised overseas borrowing norms for infrastructure companies, the government fears that the steps taken are not adequate and the credit squeeze may spill over to other sectors.
According to official sources in New Delhi, discussions were on with the central bank on the more complex issue of RBI's economic capital framework, which will decide the amount of reserves to be maintained by the RBI while handing over the balance to the government.
The RBI said earlier this week that it would inject Rs 12,000 crore into the market by purchasing government securities on November 15.
"Based on an assessment of prevailing liquidity conditions and also of the durable liquidity needs going forward, the Reserve Bank has decided to conduct purchase of Government securities under Open Market Operations for an aggregate amount of Rs 120 billion on November 15, 2018, through multi-security auction using the multiple price method," an RBI statement had said.
IANS