Former RBI deputy governor Viral Acharya. Photo: Reuters
Mumbai: Viral Acharya was a strong believer in the independence and autonomy of central banks. He considered this independence crucial for the country’s economic progress and financial stability, and had even warned that any government undermining the banks’ authority would face the wrath of financial markets and economic fires.Acharya, who has quit six months before his three-year term as the deputy governor in-charge of the monetary policy department ends, had noted that many nations are seeing their central banks’ independence being compromised and had asserted that independent central bankers will remain undeterred.
The Reserve Bank of India has gone through a tumultuous time in the past two and half years, starting with a change in policymaking where rate-setting shifted to a six member panel – which experts commended as a step in the right direction, much to the surprise resignation of governor Urjit Patel, in December, 2018.
Speculation about Acharya’s exit had started on the day of his boss’s resignation, forcing the RBI to deny it then.
Acharya went public with his thinking on the sensitive topic of central bank independence during a speech at the peak of the run-ins between Mint Road and the Central government that culminated in Patel’s departure on December 10 last year. The speech included specific mentions of points of differences, like the government eyeing the RBI’s capital buffers.
Citing an Argentinian example, where governor Martin Redrado’s resignation over differences with the government was not taken kindly, Acharya had warned of the consequences that await.
“Governments that do not respect central banks’ independence will sooner or later incur the wrath of financial markets, ignite economic fires, 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 had said in the October 2018 speech delivered in Mumbai.
He had further said that while the theme of independence is of great sensitivity, it is of even greater importance to the country’s economic prospects.
Acharya, who will now return to the New York University’s Stern Business School in August instead of in 2020, said he felt that the RBI has made good progress in earning its independence, pointing to the formation of the rate-setting monetary policy committee.
“To secure greater financial and macroeconomic stability, these efforts (like the monetary policy committee) need to be extended to effective independence for the Reserve Bank in its regulatory and supervisory powers over public sector banks, its balance- sheet strength, and its regulatory scope.
Such endeavour would be a true inclusive reform for the future of our economy,” Acharya had said in the same speech.
In the speech (that was delivered just a month before Patel’s resignation and the subsequent appointment of retired career bureaucrat Shaktikanta Das as RBI governor), Acharya had said that appointing a non-technocrat to a key position is among the ways in which the independence is compromised.
“Appointing government (or government-affiliated) officials rather than technocrats to key central bank positions, such as governor, and more generally, senior management, is among the ways the institutional autonomy can be undermined,” he had said.
He had also highlighted steady attrition and erosion of statutory powers of the central bank, blocking a rules-based approach and setting up parallel regulatory agencies with weaker statutory powers as other ways in which the bank could stand to lose its freedom.
Acharya, who was called the “poor man’s Raghuram Rajan” thanks to his many similarities with the bank’s former governor who also left the RBI, had also warned of a talent crisis at a central bank if its independence is seen to be compromised.
“When the governance of the central bank is undermined, it is unlikely to attract or be able to retain the brightest minds that thrive on the ability to debate freely, think independently and affect changes. Attrition of central bank powers results in attrition of its human capital and deterioration of its efficiency and expertise over time,” he had said.—The Wire