The buzz about a solution comes in the wake of a meeting between PM Modi and Urjit Patel
The Reserve Bank of India and the government are slowly moving towards resolving some of their differences ahead of a crucial meeting of the central bank's board on November 19. Sources said the two sides are close to finding a solution to the two key differences - liquidity and credit issues - which triggered the rift that became public earlier this month. This, sources said, ruled out any possibility of resignation by the RBI governor Urjit Patel, which was anticipated by the Congress over the last weeks.
In recent weeks, the government was seen to have been ramping up pressure on the regulator to relax lending curbs and hand over surplus reserves. The government, the Congress alleged, had demanded Rs. 1 lakh crore from the central bank reserves in face of huge fiscal deficit and the need to boost economy in an election year.
The bank, which earlier said it would inject Rs 40,000 crore into the market in November, will release the first tranche of the money - Rs 12,000 crore - on November 15.
In a statement, the bank said it has decided to purchase government securities through Open Market Operations. In October, the bank had injected Rs 36,000 crore into the market.
The move comes amid worries of liquidity crunch after defaults at one of the country's largest infrastructure financing companies.
News agency Reuters reported that the bank is also considering easing up on lending curbs on some banks - which is another contentious issue. The RBI had barred 11 state-run banks from lending, demanding they reduce bad debt and become profitable.
The buzz about a solution comes in the wake of a meeting between Prime Minister Narendra Modi and the bank's Governor Urjit Patel that took place last week. Sources said the Prime Minister wanted to have a "first-hand account" and explain to Mr Patel his government's perspective, sources told NDTV after the meeting.
The tension between the bank and the government looked ready to boil over at the November 19 meeting, especially after the government took the unprecedented step of invoking Section 7 of the RBI Act. The provision enables the government to consult and give instructions to the RBI chief, citing public interest.
Senior Congress leader and former union finance minister P Chidambaram said it was likely that at the meeting, the government might try to force the hand of the RBI chief - who had rejected the demand to hand over surplus cash - through its men on the board. In that case, the Governor's only two options will be to give in or resign, he had said.