At a press conference on 6 June just after the Reserve Bank of India (RBI) announced its third consecutive rate cut, the usually outspoken deputy governor Viral Acharya was quiet as his colleagues fielded queries from the assembled media.
Throughout the conference, Acharya kept his head down, eyes focused on his papers and hands busy scribbling away. To many journalists present in the RBI conference room that day, Acharya’s body language should have been an indication of his plans.
On Monday, RBI announced the resignation of Acharya, a move with implications for the bank’s independence and future monetary policy. Submitted a few weeks ago and possibly before the last meeting of RBI’s monetary policy committee (MPC) earlier this month, his resignation request is under consideration.
The central bank said Acharya had stated his inability to continue beyond 23 July, adding, “Consequential action arising from his letter is under consideration of the competent authority."
The resignation, six months before the end of his term citing “unavoidable personal reasons", has, however, not come as a surprise for RBI watchers.
Rumours have been swirling since Urijit Patel resigned as RBI governor last year following a prolonged confrontation with the government over a number of issues. In many of these confrontations, Acharya was viewed as Patel’s supporter. It was considered only a matter of time before Acharya also put in his papers.
Acharya, who joined RBI as a deputy governor in January 2017, was supposed to complete three years in his role. While it is not yet known who will succeed Acharya, expectations are it will be an external candidate. “The RBI is likely to look for an external candidate for Acharya’s post. Monetary policy is not the domain of the current DGs," said an RBI board member.
Some insiders say that in several informal discussions, Acharya had expressed his eagerness to return to his family back in the US. “I have decided to leave six months early due to unavoidable personal reasons. So much to finish in the last month! I am sticking to my schoolteacher’s advice: when your work speaks for itself, don’t interrupt," he said.
Nomura said in a note that the composition of MPC will likely become incrementally more dovish, as Acharya stood on the more hawkish side of the policy spectrum.
In his role, Acharya is in charge of several departments, including the monetary policy department that includes forecasting and modelling, corporate strategy and budget department, and the department of economic and policy research.
A strong supporter of the central bank’s independence, Acharya was the first to sound the bugle when things were going wrong between RBI and the government. In an explosive speech in October last year, Acharya defended RBI’s autonomy, which was seen to be under threat from government interference.
“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; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors, and longer life spans," he said in his speech.
The speech exposed the rift between RBI and the government over several issues, chiefly who controls RBI’s reserves; relaxing norms for weak state-owned banks; liquidity for non-banking finance companies; and concessions on capital adequacy. Matters came to a head when the government threatened to invoke Section 7 of the RBI Act, 1934, that would have allowed the government to give directions to the central bank. The government’s choice of directors on the RBI’s board also became a source of disharmony.
The face-off ended with the abrupt resignation of Patel as RBI governor.
While Acharya continued in his role until new governor Shaktikanta Das settled in, signs of discomfort were visible. In both the February and April policy meetings, Acharya called for a pause, while Das voted for a rate cut. In the policy meeting this month, Acharya voted for a rate cut—but with some hesitation as risks to inflation were higher due to fiscal undercurrents. While he felt that fiscal slippage should factor in the implications of higher borrowings by public sector enterprises, Das argued that these enterprises have their own sources of revenue and should be viewed differently.
Another reason for Acharya’s departure might be Das’s attempts to dismantle the regulatory structure erected by Patel and Acharya. One, the leverage ratio for banks—which is now being relaxed to allow banks to lend more—was part of the revised prompt corrective action framework introduced in April 2017. Two, RBI also proposes to review the existing liquidity management framework, which was introduced in September 2014 and drew on an Urjit Patel panel report on revising and strengthening the monetary policy framework.
A look at the minutes of the monetary policy committee showed that while Acharya’s voting matched with those of Patel, he twice voted against resolutions supported by Das. Das voted for 25 basis point cuts in repo rate in February, April and June; Acharya voted for a pause in the first two, relenting only in June.
“In spite of my dilemma, I vote—albeit with some hesitation—to front-load the policy rate cut from 6% to 5.75%," said Acharya in the June MPC meeting. Acharya picked a literary allusion to explain his decision: “How should I vote? I found that I was speaking to myself as Santiago, the old fisherman, in The Old Man and the Sea by Ernest Hemingway."
“It is better to be lucky. But I would rather be exact. Then when luck comes, you are ready."