Financial markets are rising at liquidity levels, shaking off the line between the RBI government

MUMBAI (Reuters) – India's financial markets rose on Monday, raising concerns about an increasing spit between the central bank and the government, and prefer to take comfort from plans for a large liquidity injection from the bank.

Brokers are trading at computer terminals at a stockbroker firm in Mumbai, January 6, 201[ads1]5. REUTERS / Shailesh Andrade / Files

On Friday night, the Reserve Bank of India (RBI) Deputy Secretary of State Viral Acharya was warned to undermine a central bank's independence could be "potentially catastrophic", indicating that it is pushing hard against the government's pressure to relax its policy and reduce its power before a general election next May.

However, India's bonds, rupees and stock markets were all reached on Monday when they took the lead from RBI's announcement, a little before Acharia's speech, that it will buy $ 400 billion rupees ($ 5.45 billion) government bonds through open-market operations in November when it seeks to inject liquidity into the market.

The injection comes from concerns about a credit crunch by default on a major infrastructure finance company.

The 10-year benchmark fell to 7.80 percent, the lowest since August 14 and compared to 7.88 percent on Friday.

Rupien rose to $ 73.32 compared to Friday's close of 73.46, while the benchmark index increased by 0.8 percent.

In the speech of top industrialists, Acharya cited the Argentine government's interference with central bank cases in 2010 as an example of what might go wrong. This led to an investor rally and an increase in bond yields, which inferiorly damaged the economy.

"Governments that do not respect the independence of the central bank will soon or later wreak havoc in financial markets, ignite economic fire and come to rue the day they undermined an important regulatory institution," he said.

The speech was a contradiction to the government's efforts to relax politics and limit any powers in the central bank, and further open a divide between the RBI and Prime Minister Narendra Modi's government.

While government officials have remained largely silent in response to the speech, the problems raised by the RBI top brass – including the government asking for higher central bank profits to finance its fiscal deficit – have been known for years.

Traders said that the market reaction did not mean that they were not so careful and warlike on the relationship between the government and the central bank.

"While the points set by the RBI are not new, it's an investor's important to see if the government provides funds to finance its fiscal deficit by forcing the central bank to transfer more money from reserves or not," says a foreign bank merchandise, adding that such short-cuts could hit the investor's feelings.

Others were hopeful that the row would be resolved.

"If people begin to ask Modi about transparency and independence of the central bank, he can Ask their officials to come to a mutual agreement with RBI, "said Ashish Vaidya, Managing Director and Trade Director, Money Markets at DBS Bank in India. He finally said a "midway will be arrived".

($ 1 = 73.35 Indian Rupees)

Editing Martin Howell and Kim Coghill

Our Standards: Thomson Reuters Trust Principles.

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