Viral Acharya Resigns As RBI Deputy Governor
RBI Deputy Governor Viral Acharya during an interview in New York. (Photograph: BloombergQuint)

Viral Acharya Resigns As RBI Deputy Governor

Reserve Bank of India deputy governor Viral Acharya has decided to step down from his post seven months before his three-year term was set to end. Acharya’s decision follows the resignation of former RBI governor Urjit Patel, who stepped down in December.

Confirming the development, RBI said Acharya decided to resign due to “unavoidable personal circumstances” and had submitted his resignation letter a few weeks ago.

"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,” the central bank said in a statement on Monday.

Speculation of Acharya’s exit has been doing the rounds since last year, when he delivered a hard-hitting speech on the need to ensure the independence of the central bank. The speech, which was delivered with the backing of Patel, came after the government sought consultations with RBI under a rare provision of the Reserve Bank of India Act, 1934. The provisions, laid down under Section 7 of the RBI Act, allow the government to give directions to the central bank considered necessary in public interest, in consultations with the governor.

The tensions between RBI and the Government eventually led to the abrupt departure of Patel in December. Shaktikanta Das, who was appointed RBI governor to replace Patel, has since managed to calm waters between the two sides, partly by acceding to the government’s demand for easier banking regulation.

“Acharya’s departure is not a complete surprise, as frictions between him and the government on issues related to central bank independence had come to the fore, including in his speech titled On the Importance of Independent Regulatory Institutions—The Case of the Central Bank delivered on 26 October 2018,” said Sonal Varma, chief India economist at Nomura.

Taking A Principled Stance

Among the contentious issues that have cropped up between the government and RBI include the demand that the central bank shell out more dividend. This suggestion was countered strongly by Acharya.

In a speech in October 2018, Acharya cited the example of the Argentinian central bank governor, who resigned after the country’s government raided the central bank’s balance sheet. “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,” Acharya had said.

The final report of the committee set up by jointly by central bank and the government to examine the RBI’s External Capital Framework is due this week.

Also read: Panel On RBI Surplus Reserves Defers Report Again

Even after Patel resigned and Das took over, Acharya has differed on key issues, this time within the Monetary Policy Committee. The MPC has cut the benchmark repo rate three times since the start of 2019.

Acharya voted against the cut two out of three times.

Acharya’s view has been that the MPC needs to focus on ensuring that inflation is kept close to the target of 4 (+/-2) percent in a durable fashion. He also argued that at least a part of the recent growth slowdown is due to temporary factors. At the June meeting, Acharya voted for a cut in rates as an “insurance” against a further slowdown.

Also read: Viral Acharya On Central Bank Independence, Inflation And Fiscal Risks

In his last MPC meeting, Acharya flagged fiscal risks that are building up.

He noted that overall public sector borrowing requirements, which appropriately accounts for extra-budgetary resources and other off-balance sheet borrowings of central and state governments, have now reached between 8-9 percent of India’s gross domestic product. This is at a level similar to that in 2013 at the time of the “taper tantrum” crisis.

His view was in sharp contrast to Governor Das’, who believed that the government has been fiscally responsible and that public sector borrowings should be seen as separate.

Also read: MPC Members Concur On Growth Slowdown But Differ Sharply On Fiscal Risks

From Academic To Tough Central Banker

Before coming to RBI, Acharya was professor of economics at New York University’s Stern School of Business. He had replaced Urjit Patel, who took over as governor in September 2016.

At the central bank, Acharya took over the Monetary Policy and Research cluster and also worked closely with the banking regulation divisions of the regulator.

Acharya has significant experience in global finance, specifically in theoretical risk assessment of the financial sector. In 2015, Acharya co-authored a research paper that analysed “the precarious condition of public sector banks” in India. The paper found that “the onus of remedying this situation through radical reform lies primarily with the government".

Acharya took his academic work and helped the regulator move ahead with a clean-up of bank balance sheets. He was instrumental in the design of the new Prompt Corrective Action framework, which ran into trouble with the government. He has also been part of the team that worked on the new stressed asset framework announced by the RBI in February.

Acharya took a hard line with the asset markets as well and reminded participants from time to time that the central bank is here to cater to the Indian economy and not to manage asset prices.

In January 2018, against the backdrop of rising bond yields, Acharya told banks that “interest rate risk of banks cannot be managed over and over again by their regulator.” The comment came after repeated requests from bankers for a special dispensation to provide for treasury losses.

Acharya had taken a similar view on demand for easier liquidity conditions. Liquidity infusions of the central bank are determined by the needs of the economy and not the price of long term assets, Acharya noted against a backdrop of rising bond yields that had prompted calls for more bond purchases from the central bank.

Acharya’s resignation will mean that the government will need to look for a candidate to fill the position. Typically, the deputy governor in-charge of monetary policy is one who has handled that division internally or has an academic track record in the area.

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