The exchange took place at a meeting of the Financial Stability and Development Council chaired by Arun Jaitley, which Urjit Patel attended as chief of the RBI or Reserve Bank of India. 

The rift between the government and the RBI surfaced after the central bank's deputy governor Viral Acharya's candid speech on Friday warning that undermining the RBI's independence could be "potentially catastrophic". 

"Governments that do not respect central bank 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," Mr Acharya had said in the speech that was widely shared on social media. 

Mr Acharya also made it a point to thank Governor Patel for his "suggestion to explore this theme for a speech", leaving no doubt that his boss was on board with the sharp message to the government. 

In what was widely viewed as a retort, the finance minister today criticized RBI and accused it of failing to prevent bad loans. " The central bank looked the other way when banks gave loans indiscriminately during 2008 to 2014," Mr Jaitley said. 

News agency Reuters quoted sources in Prime Minister Narendra Modi's Office as saying that government officials were upset with the RBI for going public with its criticism.  Officials were worried that such a rift could tarnish the country's image among investors, the sources were quoted as saying. 

The financial stability committee meets as the government tackles the aftermath of the IL&FS crisis, in which the shadow lender defaulted on its debt payments.  The crisis has provoked fear of contagion with a longer shadow on Asia's third-largest economy. 

The RBI reportedly told the government there is "no liquidity crunch" and no sign of stress in Non-Banking Finance Companies. 

The government reportedly urged the central bank to ensure that the situation ""did not worsen".