Reserve Bank of India (RBI) Governor Urjit Patel met Prime Minister Narendra Modi on last Friday (November 9). The meeting was aimed to sort out the contentious issues between the government and the central bank, government sources told India Today TV.

The sources said that during the meeting, Patel discussed various points of friction between the RBI and the Prime Minister's Office. They said that following the meeting, the RBI may agree to some demands of the central government.

News agency PTI also reported that Patel was in the national capital on Friday.

The meeting is significant as the market and the banking system have been abuzz that the rift between the government and the RBI had reached a point of no return and Patel, handpicked by the prime minister after Raghuram Rajan, may leave before the end of his tenure of three years.

The meeting comes at a time when the RBI and the Centre are having differences over issues ranging from the appropriate size of reserves that RBI must maintain to ease of lending norms to step up growth in an election year.

ALSO READ | Why RBI and government are fighting

Last month RBI Deputy Governor Viral Acharya had cautioned that undermining RBI's independence may be catastrophic. "Governments that do not respect central bank's 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," he had said in a speech.

Days later, the All India Reserve Bank Employees Association, in a strongly worded statement, warned the government against riding roughshod over or undermining the central bank's autonomy. The union asked "right-minded people" and "experts" to persuade the government to let the RBI do its job in an "unfettered" manner.

Tensions between the RBI and the government have escalated recently, with the Finance Ministry initiating discussion under the never-used-before Section 7 of the RBI Act which empowers the government to issue directions to the RBI governor.

The sentiment in the finance ministry, however, before the meeting was that the RBI hadn’t done enough to remedy the situation. That’s why despite the peace efforts, the government was said to be in no mood to step back without tangible signals from the RBI in the confrontation.

Last week, Economic Affairs Secretary Subhash Chandra Garg had said the government was not in any dire need of funds and that there was no proposal to ask the RBI to transfer Rs 3.6 lakh crore.

He further said the only proposal "under discussion is to fix appropriate economic capital framework of RBI".

Economic capital framework refers to the risk capital required by the central bank while taking into account different risks. The RBI has a massive Rs 9.59 lakh crore reserves.

Patel's meetings at the PMO came days before the RBI's crucial board meeting on November 19 during which contentious issues are likely to come up for discussion.

Sources said the government nominee directors and a few independent directors could raise the issue of interim dividend along with the capital framework of RBI.

However, any change in the central bank's economic capital framework can be carried out only after making amendments to the RBI Act, 1934.

Other issues which could be raised include alignment of capital adequacy norms with those in advanced countries and some relaxation in the Prompt Corrective Action framework, sources said, adding more measures to enhance lending to MSMEs and NBFCs may also be discussed.

The RBI had taken few tentative steps to signify that it was not rejecting the government's concerns that there was a scarcity of funds and non-bank lenders reliant on short-term funding for long-term assets are credit squeeze.

The RBI also created a special window for non-banking finance companies (NBFCs) and housing finance companies (HFCs) so that they could raise money by issuing bonds. The government feels that the changes in the external commercial borrowings or the ECB would help, but would not be adequate to neutralise the ongoing stress.

The government data showed that there was a crisis brewing as far as the NBFCs and HFCs were concerned. They needed money promptly to repay maturing debt.

Meanwhile, sources said there are indications that the RBI may create a special dispensation for lending to small and medium enterprises, but it was not immediately clear if an agreement has been worked out to ease liquidity situation for non-banking finance companies (NBFCs) and the RBI parting with its substantial part of its surplus.

(With inputs from Rahul Shrivastava and PTI)