The unconventional RBI Deputy Governor Viral Acharya’s resignation comes as no surprise, but it may spark debate on RBI's independence. His now famous, or infamous, 'wrath of the markets' speech had set the stage for his exit a long time ago.
After a spate of clashes with the government, the unconventional RBI Deputy Governor Viral Acharya’s resignation comes as no surprise, but it may once again spark a discussion on the independence of RBI. Viral Acharya’s departure was anticipated for quite some time now; his now famous (or infamous) ‘wrath of the markets’ speech in October last year had set the stage for his exit, experts say. “I think this resignation was well expected after his speech in October, where he warned of dire consequences for the central bank or for India if the independence of the central bank was threatened,” noted economist Surjit Bhalla, Chairman, Oxus Investments, told CNBC TV18 after the Business Standard reported today morning that Viral Acharya had resigned as RBI Deputy Governor six months ahead of the end of his three-year term. “ It’s really not that much of a surprise,” Surjit Bhalla said.
However, why he chose to quit now and not earlier, or not at the end of the term, is a question that remains unanswered. “The timing is a bit of a surprise to be honest. The speculation was that he would leave immediately after (former Governor Urjit Patel) left…” money market expert Ananth Narayan, Professor, SPJIMR, told CNBC TV18. “The fact that he stayed on for so long, is probably a surprise. The timing given that he has only six months left is a bit of a surprise,” Ananth Narayan said.
The Reserve Bank of India, later confirmed Viral Acharya’s resignation. “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,” RBI said in a statement.
The ‘Viral’ speech
RBI Deputy Governor Viral Acharya took the government head on in his speech on 26 October 2018, amid reports and rumours of RBI’s rising tiff with the government over the central bank’s independence. “His speech on 26 October last year, where he talked of ‘wrath of markets’ and independence of central banks, was what actually triggered the entire dispute between the RBI and the government in the public domain,” Ananth Narayan said.
In the speech, Viral Acharya had quoted the former chief of the Central Bank of Argentina to make his point about the consequences of tinkering with the autonomy of central banks. This had irked some. The usually calm billionaire investor Rakesh Jhunjhunwala, had slammed Viral Acharya for talking about India in the same vein as Argentina in terms of fiscal situation.
Viral Acharya, like the then Governor Urjit Patel, had took on the government for RBI’s independence. His two speeches brought the differences between the RBI and the government out in the public domain. In his 26 October speech, Viral Acharya had said: “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.” The then Economic Affairs Secretary Subhash Chandra Garg soon retorted, pointing out to low bond yields, soaring stock market, strong rupee and cheap crude oil price.
The speech raised various important issues and made public the bone of contention between the RBI and the government. “When he made the speech on October 26, he referred to a whole series of issues relating to central bank’s independence. One of those was transfer of the so called excess capital on the RBI’s books to the government,” Ananth Narayan said.
How much his resignation matters
While Viral Acharya’s resignation is not a surprise for the medium term, since he was always seen as the dissenting voice, this might raise questions on the independence of the RBI, Ananth Narayan said. “But the institution is big enough, the country is big enough, we will move on,” he added. As for the market, Surjit Bhalla said there is no reason for the markets to be much affected by Viral Acharya’s resignation. “Even for two central bank governors, one whose term was not extended, and the other who resigned for personal reasons, the market was quite unaffected,” Surjit Bhalla said referring to Raghuram Rajan and Urjit Patel, without naming them. “I would expect the same, as this is after all the Deputy Governor. I wouldn’t think of any reason for the market to be upset or not react to the basic fundamentals that are going up,” he added.
Where RBI goes from here
What Viral Acharya’s resignation probably means is that one dissenting voice on MPC moves on, which means future results in the MPC will be decided by 5:1 majority, particularly after the Budget, Ananth Narayan said. Nomura economist Sonal Varma echoed the sentiment. “At the margin, the composition of the MPC will likely become incrementally more dovish as Viral Acharya stood on the more hawkish side of the policy spectrum,” Sonal Varma said. She expects the RBI’s Monetary Policy Committee (MPC) to vote for another 25 basis points rate cut in August.