Viral Acharya Resigns: Experts Caution Against Reading Too Much Into It

Reserve Bank of India deputy governor Viral Acharya on Monday announced his resignation from the central bank. Acharya’s resignation comes six months after Urjit Patel quit as governor amid a standoff with the government. Like Patel, Acharya, during his term, had taken a stance different from that of the government on issues like the RBI’s balance sheet, liquidity and, most recently, on fiscal risks.

Experts, however, believe that Acharya’s resignation will have limited impact on the markets. Too much should not be read into his decision to step down a few months before his term was set to end, said public policy veterans.

Limited Market Impact

Sonal Varma, chief India economist at Nomura Global Market Research, wrote that Acharya’s exit is not a complete surprise. Varma cited Acharya’s speech on the issue of RBI independence as an indicator of frictions between him and the government.

His exit will have a limited impact on markets and on expectations of the policy path ahead, Varma said, while highlighting that news reports suggest that RBI executive director Michael Patra and economic adviser Sanjeev Sanyal could be in the running for the post.

“At the margin, the composition of the MPC will likely become incrementally more dovish, in our view, as Viral Acharya stood on the more hawkish side of the policy spectrum,” Varma said. “Michael Patra’s views are well known, while Sanjeev Sanyal has argued for lowering the cost of capital in the past. Other candidates could be discussed in coming days."

Rohit Garg, head of forex and rates for Asia at Bank of America-Merrill Lynch, also expects the markets to shrug off Acharya’s resignation. Garg pointed to the lack of reaction in the markets even at the time of Patel’s resignation.

“In the past, we had higher-profile resignations, including Raghuram Rajan and Urjit Patel. But if you see the impact on the forex market or bond market, it has been very much short-lived. Keeping that in mind, this most recent resignation should also have a limited impact on the market,” Garg told BloombergQuint.

He added that the policy path, for now, will clearly be determined by the increasing concerns around growth.

“Regardless of whether there is RBI independence or not, economic growth is slowing down, which is a global phenomenon. Inflation is also slowing down. There are no signs of any inflationary activity at all... To me, the path is clear whether it is a hawk or dove (who replaces Acharya). Policy needs to be eased regardless of how things are,” said Garg.

Ananth Narayan, associate professor of finance at SP Jain Institute pointed out that the Indian central bank is not alone in facing pressure. “It is not just the RBI whose independence is being questioned but even the Federal reserve is under attack and market is taking it in their stride,” Narayan said while adding that markets are different today than there were ten years ago when such an event may have shaken confidence.

Message In The Resignations

Beyond any immediate impact on markets, questions have been raised about whether recent resignations at RBI suggest that the central bank is not being allowed adequate autonomy.

Veteran economists and policy makers do not believe that is the case and caution against reading too much into Acharya’s resignation.

Pronab Sen, former chief statistician of India and an adviser to the erstwhile Planning Commission, said that while officials in the government have enough opportunity to speak their mind, different arms of the government cannot pull in different directions.

“I don’t think anybody who has been looking at macroeconomic policies believes that there can be complete separation between monetary and fiscal policy,” said Sen.

“If the independence of RBI is interpreted as saying that RBI should consistently go against the fiscal intent, then that is the wrong approach. There are points in time where they need to move in different directions and times when they have to move together,” he added.

S. Narayan, former finance secretary to the Indian government, shared Sen’s view and said that Acharya’s resignation will have a limited impact on the direction of policy.

“I don’t think we need to examine this with a magnifying glass,” said Narayan, adding that policymakers in the past have also chosen to return to academics after a stint in policymaking institutions.

The exit of any one official should not have an outsized impact on policy decisions, Narayan said.