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Last Updated : Jun 26, 2019 02:34 PM IST | Source:

Digging Deeper | Viral Acharya Quits: What's going on between the govt and the RBI?

Three high profile exits in the central bank raise more questions

Moneycontrol Contributor @moneycontrolcom

Harish Puppala | Rakesh Sharma

It’s no secret that the Narendra Modi-led NDA government has been at loggerheads with the Reserve Bank of India since its early days in 2014. In fact, this combative equation came up for discussion in the run up to the general election. Turns out the common man doesn’t care what the RBI thinks of the PMO but the lack of confidence that the govt and the RBI have displayed in each other has seen some quarters express concern.


In Modi’s second term, that relationship, fraught at the best of times, continues in the same vein.

News broke a few days ago that RBI Deputy Governor Viral Acharya quit hi position six months before the scheduled end of his term to return to New York University Stern School of Business in August as CV Starr Professor of Economics.

After Raghuram Rajan and Urjit Patel, Acharya is the third RBI senior to make news with his exit, and the second high profile exit in recent times. Given his image as an independent voice in the RBI, the speculation is that there is more to the story. In this podcast, we’re taking a look at Acharya’s exit and examining the Modi govt’s relationships with RBI bosses.

Acharya’s exit

A couple of days ago, the Reserve Bank released a statement that read, “A few weeks ago, Dr Acharya submitted a letter to the RBI informing that due to unavoidable personal circumstances, he is unable to continue his term as a Deputy Governor of the RBI beyond July 23, 2019.  Consequential action arising from his letter is under consideration of the Competent Authority.”

Viral Acharya, the RBI’s youngest Deputy Governor, told Moneycontrol he decided to leave six months early due to 'unavoidable personal reasons'. He said, somewhat cryptically, “For now I am sticking to my school teacher's advice: When your work speaks for itself, do not interrupt.”

Independent RBI director Satish Marathe asked the media not to read too much into the move since Acharya is returning to New York University to teach. He said, "...the academic season starts now so he might have opted to go before his term gets over." That said, Acharya's past vocal stand against the Centre, at a time when the fractious relationship between the RBI and the government had reached epic proportions, means that speculation is rife regarding the reasons behind his resignation.

The primary reason for such speculation is Acharya’s speech from October last year. On October 26, 2018,  three days after the RBI's board meeting, Viral Acharya spoke at the AD Shroff Memorial Lecture about the importance of independent regulatory institutions, a topic he claimed had been suggested by Urjit Patel. In a talk stretching beyond 90 minutes, he emphasised that undermining a central bank's independence is akin to committing a "self goal" for any government. He said, "Governments that do not respect (the) 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.” Acharya also claimed that a government’s horizon of decision-making is rendered short, like the duration of a “T20 match” as there are always upcoming elections of some sort – national, state, mid-term. In contrast, a central bank plays a “Test match”, with the bank trying to win each session but importantly, also trying to survive it so as to have a chance to win the next session. Yes, a bit cringe those cricket analogies but you get his drift, right?

Business Today claimed that speech exposed the rift between the RBI and the government in the preceding months over issues ranging from lending curbs, more cash availability to the non-banking finance companies (NBFCs), right down to who controls the institution's reserves. The government reportedly wanted the RBI to part with a third of its reserves, which the central bank refused. The government had also allegedly packed the RBI board with its own nominees, who were vocal about their disagreements with Patel and his deputy governors.

Acharya's outspokenness brought matters to a head, marking the peak of the discord between govt and central bank. The rift also affected markets, prompting the government to issue a statement in support of the central bank's autonomy. Despite that, things got quite choppy and it was widely rumored  that Urjit Patel and/or Acharya would either resign or face the axe in RBI's November board meeting. But the apex bank backed down from its confrontational stance and agreed to discussions on nearly all the issues that the Centre had raised. Despite the apparent thaw in the relationship, the pundits' prediction that the government was likely to find another RBI governor, more in tune with the finance ministry’s thinking, eventually came true. Patel abruptly resigned in December, kicking off speculation that his protege Acharya would also follow suit.

Acharya, however, stayed put. Then, in a move that upset many critics of the centre, the government appointed former Economic Affairs Secretary Shaktikanta Das as the 25th Governor of the RBI. Unsurprisingly, Das has displayed a willingness to consider all issues on the table and employed a more consultative approach in order to avoid being seen as confrontational. That has led to reports that Das and Acharya don’t always see eye to eye.

Moneycontrol noted that cleaning up the banking system has been one of the main focus areas for Acharya since his early days as deputy governor. He believed that the RBI’s Prompt Corrective Action (PCA) was an effective tool in this exercise. The chief economist of a private sector bank, on condition of anonymity, told Mint, “The MPC (Monetary Policy Committee) has lost a contrarian voice and the voice of the sceptic, which lends the much needed balance to discussions and this is necessary for sound decision making.”

Mint also observed that the timing of Acharya’s resignation might prove painful because a separate panel under former RBI governor Bimal Jalan is examining the central bank’s capital and the possibility of some of it getting transferred to the government. However, beyond the debate about central bank independence is the realization that Acharya brought a specific skill set to the monetary policy discussions. He had highlighted the implications of policy decisions, or the lack of them, on financial markets in many past meetings. Media reports indicated that in the latest MPC meeting, which was held in June, Acharya had flagged concerns over a surge in public sector borrowing crowding out the private sector, and listed the implications of such a rise in public sector borrowing.

Acharya’s last day with the RBI will be 23 July. In the meantime, he is in charge of the Financial Stability Unit, Monetary Policy Department, Department of Economic and Policy Research, Financial Markets Operation Department, Financial Market Regulation Department, among others.

Meanwhile, a Business Standard report claimed that the senior-most RBI deputy governor, N Vishwanathan, who was due to retire next month, is likely to stay back for another term.

Run-ins with previous RBI governors

Acharya’s exit merely highlights what a challenging work environment it has been for the RBI of late. By all accounts, both Narendra Modi administrations have been more hands on when it comes to matters concerning the economy. That has led to years of discomfiture that the RBI’s independence has been impinged.

As we’ve mentioned before, Acharya is not the first RBI senior official to quit before the expiry of his term. In December 2018, RBI Governor Urjit Patel had resigned nine months before his term ended. Moneycontrol noted that the rift between RBI and the government came into full public view in 2014 itself due to differences over the composition of the MPC. The government's original draft bill suggested that four out of seven members of the MPC be appointed by the government. A central bank panel 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 has the final vote in case of a tie.

Raghuram Rajan, one of the most popular governors the RBI has had, was at the helm when Narendra Modi swept to power in 2014. Modi was all praises, extolling Rajan’s “perfect” explanations of complex economic issues in just 3-4 slides. Yes, powerpoint slides. Modi expressed satisfaction that there was a "lot of similarity between the thinking of the RBI and government". But that bonhomie soured pretty quickly.

In 2016, Rajan was at the receiving end of comments from BJP MP Subramanian Swamy over his policies on inflation. Swamy had written to the Prime Minister seeking Rajan’s 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 had, of course, talked to the media, at some length, about political matters, which, one could safely speculate, did not win him any supporters in the Modi administration. Rajan became the first RBI Governor in two decades to not be offered a second term. His deputy, the decidedly more discreet Urjit Patel, took over as the central bank’s chief in September 2016.

However, perhaps on account of karma being what it is, Patel also proved to be quite the belligerent RBI chief. Soon after he took office, Narendra Modi did the thing that terrifies us to this day when there is an announcement that the Prime Minister will make an unannounced, er, announcement on TV. Yep, demonetisation. Initially, it was believed the RBI was in favour of the disruptive move. But reports later claimed that the minutes of an RBI meeting revealed that the central bank had warned of demonetisation's short-term effects, saying it would not have a material impact on curbing black money. In August 2018, an RBI report said almost 99.3 percent of banned notes came back into the system.

Trouble began again when the government asked for capital from the central bank’s excess reserves. The government had even suggested the use of Section 7 of the RBI Act, which would give it more power to instruct the RBI. It was then that VIral Acharya made that combative speech about the central bank’s independence.

Ibn December of 2018, Urjit Patel resigned as Governor of the Reserve Bank. That resignation came as a surprise despite the strained relations between bank and govt. Patel still had nine months of his term remaining. In a statement that indicated that matters may have deteriorated, the Prime Minister himself commented on Urjit Patel’s exit. Modi said, “The RBI governor himself requested (to resign) because of personal reasons. I am revealing for the first time, he was telling me about this for 6-7 months before his resignation. He even gave it in writing. He wrote to me personally. No...question (of political pressure) arises. I acknowledge that Patel did a good job as RBI governor.”

The less than effusive praise for the man who oversaw Modi’s demonetisation gambit is somewhat telling. Modi’s statement came a day after then finance minister Arun Jaitley told Parliament that the composition of the expert committee to suggest how the central bank should handle its reserves, and whether it can transfer its surplus to the government, was finalized when Patel was still the RBI governor. Mint claimed that was  contrary to the belief that the composition of the high-level committee headed by former RBI governor Bimal Jalan for examining the economic capital framework was finalized and a compromise to have a vice chairman in former RBI deputy governor Rakesh Mohan in the panel was arrived at after Shaktikanta Das took charge as the RBI governor on 12 December.

What now?

In the MPC meeting earlier this month, Acharya voted for a rate cut but claimed to have done so with "some hesitation" due to the "mixed picture on economic growth". The Economic Times reported that Das and Acharya differed strongly on the state of the fiscal deficit and how to account for that. While the Governor said that it was unfair to club the borrowings of state-run enterprises into the state of fiscal deficit, Acharya said that the borrowing requirement of PSUs matter to the overall deficit.

All things considered, Acharya's resignation could well be an indication that differences continue to exist between the apex bank and government in terms of decision making. He was seen as the last man in the RBI vociferously defending its autonomy. At the very minimum, this episode turns the spotlight on the Modi government's growing HR problem. Too many respected economists have quit abruptly, including former Chief Economic Advisor Arvind Subramanian, Niti Aayog's Arvind Panagariya, Patel and now Viral Acharya.

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First Published on Jun 26, 2019 02:34 pm
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