Viral Acharya’s exit from Reserve Bank of India takes away a key voice of dissent

When the monetary policy committee (MPC) was first formed in October 2016 with six members, it was criticized for the lack of dissent, as the voting pattern was unanimous for four consecutive meetings.

However, the dissenters’ club increased in subsequent meetings, adding depth and quality to discussions, and giving markets the assurance that monetary policy decisions were put through rigorous arguments.

Central bank watchers believed that this rigor would diminish with the exit of deputy governor Viral Acharya from the Reserve Bank of India (RBI) and, hence, the MPC.

Acharya was one of the two dissenting voices in the previous meetings, barring the June meeting, wherein the decision was made unanimously. Even in the June meeting, Acharya had “reluctantly” sided with the majority, according to the minutes of the meeting.

“The MPC 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,” said the chief economist of a private sector bank, on condition of anonymity.

With Acharya resigning before the end of his term, it is no wonder that concerns about the independence of the RBI have resurfaced. Only about six months ago, Urjit Patel had prematurely resigned from the central bank governor’s post.

The timing of Acharya’s resignation is more painful as a separate panel under former 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 loud 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.

Acharya underlined the finance-neutral output gap often in policy discussions, sensitizing MPC members of the implications of liquidity, policy measures and stance on financial markets, and the behaviour behind investment decisions.

He also added heft to the central bank’s efforts in cleaning up public sector banks by highlighting the importance of financial sector regulation.

Acharya had also sensitized MPC members of the risks from external factors, such as global financial volatility, and the flow of capital into and away from emerging markets, which influenced the policymaking of the central bank.

“His contribution was that he brought the financial stability angle to the monetary policy discussions. Financial stability and monetary policy cannot be viewed separately. To that extent, it would be a loss,” said an economist from another private sector bank, also requesting anonymity.

Even in the latest MPC meeting earlier this month, Acharya had flagged concerns over a surge in public sector borrowing crowding out the private sector. Acharya’s arguments were elaborate and he listed the implications of such a rise in public sector borrowing.

The RBI deputy governor’s exit leaves a gap as far as discussions on markets and financial stability go. For MPC, the loss of a voice on regulation and financial stability is clearly a challenge.