RBI deputy governor follows Urjit Patel: MPC may take a dovish turn as Viral Acharya departs

MUMBAI: The exit of Viral Acharya from the Reserve Bank of India (RBI) as deputy governor could probably mark the end of the reign for conservatives with degrees from foreign universities playing a significant role in India’s policy making.

Acharya follows former RBI governors Raghuram Rajan and Urjit Patel who both left the central bank after failing to get along with the government. Their reign was marked by strong measures to clean up the banking system and introduction of new ideas such as inflation targeting. They also fought for RBI’s independence.

Acharya, the New York University professor who became the youngest deputy governor, has been a strong advocate of conservatism when it came to both monetary policy and dealing with financial markets.


The markets are sensing that there could be changes in the way Monetary Policy Committee (MPC) conducts itself from now on. “At the margin, the composition of the MPC will likely become incrementally more dovish, in our view, as Acharya stood on the more hawkish side of the policy spectrum,” said Sonal Varma of Nomura Securities. “(MPC member 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.”

RELUCTANTLY VOTED FOR RATE CUT
Speculation is rife that Rhodes Scholar Sanjeev Sanyal, principal economic advisor to the finance ministry, may be next in line to replace Acharya.

When RBI and the Centre were indulging in war of words over transfer of excess capital and letting state-run banks off the hook for their bad finances, Acharya was in his elements in stepping out to defend the central bank’s role. Drawing examples of ruin and threat from former Argentina’s central bank chief, who had quit over the issue of transfer of reserves, to the Turkish debacle and the US president’s public criticism of their central banks’ actions, Acharya had said undermining the regulator’s independence could be ‘catastrophic’.

“A government’s horizon of decision-making is rendered short, like the duration of a T20 match (to use a cricketing analogy), by several considerations,” Acharya said last October. “There are always upcoming elections of some sort — national, state, mid-term, etc. In contrast, a central bank plays a Test match, trying to win each session but importantly also survive it so as to have a chance to win the next session, and so on.”

He strongly argued against the government’s plans to form a separate payments regulator which would weaken the entire payments system.

“Setting up parallel regulatory agencies with weaker statutory powers and/or encouraging development of unregulated (or lightly regulated) entities that perform financial intermediation functions outside the purview of the central bank undermines the central bank independence,” said Acharya.

After Patel’s exit last year, Acharya was probably the lone conservative voice on policy issues such as easing of the prompt corrective action framework, a move that allowed many weak state-run banks to begin lending again.

“When the government is often seen making efforts to dilute the central bank’s policies and effectively coercing it into such dilutions, banks and private sector spend more time lobbying for policies that suit them individually, at the cost of collective good, rather than investing in value creation and growth,” Acharya had said.

Patel had quit after constant hectoring from the bureaucracy over the transfer of capital reserves to the government from the RBI and a special bailout package for nonbanking financial companies (NBFCs).

‘BUILDING OWN IMMUNITY’
“Recourse to such asymmetric options — heads I win, tails the regulator dispenses — is akin to the use of steroids,” Acharya had said. “They get addictive and have long-term adverse effects in the form of frequent relapse even though their use may be justified to relieve occasional intense pain. Hence, it would be better for the banking system to build its own immunity and strength.”

Although the MPC had started cutting interest rates this year, Acharya has been reluctant to vote for it, though he did so in the last policy review with reluctance, which he explained with borrowed lines from a short novel by Ernest Hemingway.

He quoted, “Why do old men wake so early? Is it to have one longer day? wonders Santiago, the old fisherman, in ‘Old Man and the Sea’. I found myself preparing and writing these minutes early too, perhaps so I could have one longer drafting day!”

State of government finances became the recent bone of contention between the academic Acharya and the government.

“There is, however, an important upside risk to RBI’s projected inflation trajectory that I wish to highlight in particular — that of fiscal slippage,” said Acharya in the minutes of the MPC meeting released on Monday. “Correct economic measurement of the fiscal slippage should factor in the implications of a rising PSBR (Public Sector Borrowing Requirement) rather than rely solely on the consolidated fiscal deficit figures.”