Mumbai: The rupee pared losses against the US dollar on Wednesday after the government said that it respects the Reserve Bank of India’s autonomy. The rupee pared losses to 0.38% to closed at 73.96 a dollar. It had weakened as much as 74.15 after news reports suggested that the government had invoked Section 7 of the RBI Act to direct governor Urjit Patel on issues related to liquidity for non-banking finance companies, capital for weak banks, and lending to small and medium enterprises.

The 10-year gilt yield stood at 7.887% against its previous close of 7.831%. Bond yields and prices move in opposite directions.

The benchmark Sensex rose 1.63%, or 550.92 points, to 34,442.05 points. Year to date, the index has risen 1.5%.

“Both government and the central bank, in their functioning, have to be guided by public interest and the requirements of the Indian economy. For the purpose, extensive consultations on several issues take place between the government and the RBI from time to time. This is equally true of all other regulators," the finance ministry said in a statement.

The statement from finance ministry came after media reports suggested that tensions between the central bank and the government worsened after Tuesday’s Financial Stability and Development Council (FSDC) meeting. There had been an irreversible breakdown between Patel and the government, CNBC TV said, adding all options were on the table.

“A tug-of-war between the central bank and government has occurred in the past, with exchanges usually heating up in a tough economic environment. India’s present situation is complicated by developments in the financial sector as a stressed banking sector and credit squeeze for NBFCs threaten to soften credit growth. Despite the pain, the regulators are likely to display tough love in the regulatory space to strengthen the financial system," said Radhika Rao, economist at DBS Bank.

“The markets have taken these developments in their stride as there is an inherent belief that the central bank is independent and will continue with its rules-based mandate, whilst the government focuses on reforms and looks to buoy growth, drawn also by the approaching elections. Nonetheless, developments are being watched closely, amidst speculation over simmering tensions," Rao added.

Earlier, finance minister Arun Jaitley had accused the central bank of sleeping on the job for its failure to check indiscriminate lending by public sector banks between 2008 and 2014.

Last week, RBI deputy governor Viral Acharya stressed the importance of a central bank’s independence and said direct intervention and interference by the government in the operational mandate of the central bank negates its functional autonomy

So far this year, the rupee has declined 13.62%, while foreign investors have sold $5.50 billion and $8.45 billion in the equity and debt markets, respectively.