Reserve Bank of India's deputy head quits, raising concerns about independence

Viral Acharya was a staunch defender of the central bank's need to act autonomously

FILE PHOTO: A Reserve Bank of India (RBI) logo is seen at the gate of its office in New Delhi, India, November 9, 2018. REUTERS/Altaf Hussain/File Photo
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The resignation of the Reserve Bank of India's deputy governor has raised fresh concerns about the independence of the central bank.

Viral Acharya, the deputy governor of the RBI and a staunch defender of the central bank's need to act autonomously of the government, said on Monday he was quitting his role six months ahead of the end of his term. Mr Acharya simply cited “unavoidable personal reasons”. But speculation has been rife that the move is connected to his vocal disapproval of what he considered to be government meddling with the RBI's work.

Mr Acharya had “ruffled feathers” and his views were “not in alignment with the approach of the government regarding the RBI”, said Sujan Hajra, a former RBI director, who is currently the chief economist at Anand Rathi, a financial services firm based in Mumbai.

“Mr Acharya’s departure is not a complete surprise, as frictions between him and the government on issues related to central bank independence had come to the fore,” wrote Sonal Varma, the chief India economist at Nomura, in a research note.

It was Mr Acharya who last year sparked a bitter and unprecedented public row between the RBI and the government. In October, he delivered a scathing speech in Mumbai in which he said that undermining a central bank's autonomy could have “catastrophic” consequences.

“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,” he said at the lecture.

Mr Acharya was also concerned about pressure on the RBI to release its surplus reserves to the government.

A dispute ensued over the following weeks which saw the RBI and the government battle over other issues including the bad debt crisis in the country's banking sector and providing access to liquidity to non-banking financial companies.

That row culminated in the resignation of the then RBI governor, Urjit Patel, who cited “personal reasons” as he stepped down.

“Mr Acharya’s resignation strikes a more than passing resemblance to the shock departure of Urjit Patel,” said Shilan Shah, the chief India economist at Capital Economics. He added that this once again “raises questions over the RBI’s credibility and its inflation-fighting credentials”.

Analysts say that Mr Acharya's departure should pave the way for further interest rate cuts by the RBI.  When it comes to monetary policy, Mr Acharya is “a hawk”, which means he veers towards keeping interest rates on the higher side in order to control inflation. The minutes of the latest monetary policy committee meeting, held earlier this month, reveal that although Mr Achraya voted for the 25 basis point rate cut, he also raised concerns about the upside risk to inflation. In the previous two meetings, he was one of the two members who voted against the rate cuts.

The government is vocal about wanting the RBI to trim rates because this can help boost a slowing economy by bringing down borrowing costs, which encourages businesses to expand and consumers to spend using credit.

There are widespread worries about the economy after official data revealed that India's GDP growth slowed to a five-year low of 5.8 per cent in the first three months of this year.

But following Mr Acharya's departure, Mr Shah said that the RBI now “has its work cut out to convince markets and investors that it remains focused on stabilising inflation close to the 4 per cent target”.

Meanwhile, Mr Hajra believes that, going forward, it is not in the “economic interests” of the country to fight such battles in public.

“Rather than voicing their opinions in an open forum, it is imperative that both government, as well as the RBI, share these opinions in closed door meetings,” he said.

“Otherwise if there is a difference of opinion and that gets public, that creates credibility problems both for the central bank, as well as for the government.”