Viral Acharya always batted for RBI's independence

Governments that do not respect central banks’ independence will sooner or later incur the wrath of the 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, said Acharya, who will return to the New York University’s Stern Business School in August.

Viral Acharya was a strong believer in the central bank’s independence and autonomy, which he considered crucial for economic progress and financial stability, and had even warned that any government undermining their monetary authorities 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 said many nations are seeing the central bank independence being compromised and asserted that independent central bankers will remain undeterred.

The Reserve Bank 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 that experts commended as a step in the right direction, to the surprise resignation of Governor Urjit Patel in December 2018.

Speculation about Acharya’s exit had started on the day of his boss’ 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 the Mint Road and the government that culminated in Patels departure in December 10 last which included specific mentions of points of differences like government eying RBIs capital buffers.

Citing an Argentinian example, where Governor Martin Redrados’ 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 the 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 on October 26, 2018 in a 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 our economic prospects.

Acharya, who will return to the New York University’s Stern Business School in August instead of in 2020, felt 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 MPC) 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 over a month before Patel’s resignation was made public and the subsequent appointment of retired career bureaucrat Shaktikanta Das as the 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.

Others may include a steady attrition and erosion of statutory powers of central bank, blocking a rules-based approach and setting up parallel regulatory agencies with weaker statutory powers, he had said.

Acharya, who was called as the poor man’s Rajan, over the many similarities with the former Governor Raghuram Rajan who also left RBI against his wishes to continue, 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 effect 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.

Photograph: Reuters