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Last Updated : Jun 24, 2019 04:46 PM IST | Source: Moneycontrol.com

Viral Acharya's resignation: A look at the reasons why RBI and govt have been at loggerheads

The rift between RBI and the government came out in the open in 2014 with differences over composition of the MPC.

Moneycontrol News @moneycontrolcom

With the resignation of RBI Deputy Governor Viral Acharya, the central bank has seen its second key exit in recent times.

Acharya's decision to step down comes six months before his tenure ends.

This is not the first time in the recent past that an RBI senior official has quit before the expiry of their term. In December 2018, RBI Governor Urjit Patel had resigned nine months before his term ended.

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The rift between RBI and the government came out in the open in 2014 with differences over composition of the MPC.

The government's original draft bill had suggested that four out of seven members of the MPC would be appointed by the government. A central bank panel had later recommended a five-member panel where three would be from the RBI.

It was finally agreed that the MPC would have three members from the RBI – the Governor, Deputy Governor and another official – and three government-appointed members. The Governor gets the deciding vote in case of a tie.

In 2016, the then RBI Governor Raghuram Rajan was at the receiving end of comments from BJP MP Subramanian Swamy over the former's policies on inflation.

Swamy had even written a letter to Prime Minister Narendra Modi seeking Rajan removal from the post. Swamy accused Rajan of an "apparently deliberate attempt to wreck the Indian economy," and called him "mentally not fully Indian."

Rajan became the first RBI Governor in two decades who was not offered a second term. Urjit Patel took over as the central bank’s chief in September 2016.

Shortly after Patel took over, the government announced demonetisation.

Initially it was believed that the RBI was in favour of the disruptive move. But the minutes of an RBI meeting eventually revealed that the central bank had warned of demonetisation's short-term effects and said it would not have material impact on curbing black money.

In August 2018, an RBI report said almost 99.3 percent of the banned notes came back into the system.

The trouble began again when the government asked for capital from the central bank’s excess reserves. The government had even threatened to use Section 7 of the RBI Act, which would give it more power to instruct the RBI.

Acharya had in October 2018 highlighted the importance of the independence of central banks, and said government interference negates its functional autonomy.

After Patel's unexpected resignation, there was speculation that Acharya’s exit would follow. Though Patel had cited “personal reasons” for his stepdown, the backdrop made it appear as a sign of protest.

Though this was not the first time the RBI and the government have clashed over independence, this was a rare occasion when the rift was made public.

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First Published on Jun 24, 2019 01:00 pm
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