Acharya's exit will raise questions on RBI autonomy

“It is better to be lucky. But I would rather be exact. Then when luck comes, you are ready” Viral Acharya quoted from 'The old man and the sea' by Ernest Hemingway as he reluctantly voted in favour of an interest rate cut in the latest Monetary Policy Committee decision.

The minutes of MPC released last week revealed that Acharya's hesitations stemmed from the fact that there was still an upside risk to inflation, which could worsen in case of a full-scale trade war.

He was also worried about the worsening public sector borrowing requirements and the rising oil prices in the global markets. Such a coincidence creates a “twin deficit” – fiscal and current account deficits – scenario for imported inflation, he said. He also flagged concerns over fiscal risks due to off-Budget expenditures of the government.

So when Acharya borrowed from Hemingway's Santiago that he would rather be 'exact' than being 'lucky', he was probably referring to the headwinds, the economy is likely to face, in what turned out to be his last MPC meeting.

Prior to that also, he had voiced his dissent on the MPC decision and voted against the majority decision. In the last two MPC meetings in April this year and and December 2018, he had voted against vote cut citing interest rate as he did not see a definitive sign of inflation coming down and crude oil prices too were volatile.

However, his most hard-hitting speech against the governments was in October 2018 when he chose to liken their short-tenure decision making with a T20 match and contrasted it with central banks' ability to play a test match, where it tries to win each session and also survive to win the next.

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..,” Acharya said in his famous DK Shroff Memorial lecture in Octobe 2018.

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.

His anger stemmed from a number of government's decisions but demonetisation, where the RBI's views were not incorporated and the issue of RBI reserve sharing with the Centre, which none at the helm of Mint Street advocated, reigned supreme.

His remarks sparked off speculation that he would quit. Instead, his boss and RBI Governor Urjit Patel quit two months later as differences between RBI and central government widened.

Acharya, was to return to the New York University Stern Business School in in 2020, will now go back to join his teaching profession much in advance like former Chief Economic Advisor Arvind Subramanian, who quit last September citing the same reason, former Raghuram Rajan, who returned to his 'first love' teaching or Niti Aayog Vice Chiarman Arvind Panagariya, who left for Columbia University. All of these top policy makers and think tank resigned before their term came to an end.

On Monday morning, when the news broke about Acharya's resignation, there were hardly any surprises but many a market watchers said his resignation would raise the question of RBI autonomy.

“Dr. 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, managing director and chief India economist at Nomura in a co-authored report with Aurodeep Nandi.

Former Prime Minister's Economic Advisory Council member Surjit Bhalla, who too quit mid way his tenure, said from his (Acharya's) last October comments, his resignation was evident.

An ardent follower of Rajan, Acharya has co-authored a few research papers with the former RBI Governor and was as vocal as him in expressing his views on various policy issues.

Acharya will leave the central bank on July 23 for good. Someone from outside the government or the central bank could replace him. However, the names of Principal Economic Advisor to finance minister Sanjeev Sanyal and Michael Patra, a member of RBI MPC are doing the rounds for the coveted post.