Why did RBI Deputy Governor Viral Acharya resign abruptly?

India's youngest deputy governor post economic liberalisation, Viral Acharya, has resigned from the post of RBI's deputy governor six months before the scheduled end of his term. He has reportedly resigned over "personal reasons" and independent RBI director Satish Marathe asked the media not to read too much into the move since he is returning to his alma mater, New York University, to teach and "the academic season starts now so he might have opted to go before his term gets over". However, eyebrows have been raised given Acharya's past vocal stand against the Centre, at a time when the fractious relationship between the RBI and the government had reached epic proportions.

While the two parties have a long history of disagreements - be it over autonomy in setting the monetary policy, regulating banks or managing the rupee value in the forex market - matters reached the public domain for the first time last year. After the Finance Ministry hinted that the RBI was lax in not preventing the Nirav Modi and Mehul Choksi fraud at PNB, former RBI Governor Urjit Patel said in a speech that the RBI did not enjoy the same powers to pull up public sector banks as it did private sector banks.

Then, on October 26 last year, just three days after the RBI's board meeting, Acharya made a fiery speech on the importance of independent regulatory institutions, a topic he claimed had been suggested by Patel. The over 90-minute long speech had emphasised that undermining a central bank's independence is akin to committing a "self goal" for any government. "Governments that do not respect central bank's 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 had added.

The speech exposed the rift between the RBI and the government in the preceding months over issues ranging from lending curbs, more cash availability to the non-banking finance companies (NBFCs), to who controls the institution's reserves. Significantly, the government wanted the RBI to part with a third of its reserves, which the central bank refused. The government had also packed the RBI board with its own nominees, who were vocal about their disagreements with Patel and his deputy governors.

Acharya's speech, which marked the peak of the discord between the two parties, had roiled markets and prompted the government to issue a statement in support of the central bank's autonomy. Despite that, things got quite choppy in the days ahead and it was widely speculated that Patel and/or Acharya would either resign or face the axe in RBI's November board meet.

Contrary to expectations, the nine-and-a-half hour long meeting ended pretty amicably, with the apex bank backing-off from its confrontationist stand and agreeing to initiate discussions on nearly all the issues that the Centre had raised with it. Nonetheless, the pundits' prediction that the government was sure to find itself another RBI governor, one more in tune with finance ministry thinking, eventually came true. Patel abruptly resigned in December - fanning speculation that his protege Acharya would also follow suit - when the RBI and the Centre could not even find a common ground over names of an expert committee that they had agreed to constitute to look into appropriate size of reserves the central bank must maintain.

The government quickly moved in and appointed former Economic Affairs Secretary Shaktikanta Das as the 25th Governor of the RBI. Their gambit to choose a former bureaucrat over yet another economist seems to be paying off. From Day 1, Das has displayed a willingness to consider all issues on the table and take a more consultative approach rather than being a confrontationalist.

But the new governor and Acharya had contradictory views, reportedly making the latter increasingly uncomfortable. In the February and April Monetary Policy Committee (MPC) meets, Acharya had argued for a status quo in interest rates instead of a rate cut over concerns around inflation and likely fiscal slippages.

In the latest MPC meet earlier this month, while Acharya finally also voted for a rate cut, he claimed to have done so with "some hesitation" due to the "mixed picture on economic growth". The Economic Times reported that Das and Acharya however differed strongly on the state of the fiscal deficit and how to account for that. While the Governor said that it was unfair to club the borrowings of state-run enterprises into the state of fiscal deficit, Acharya said that the borrowing requirement of PSUs matter to the overall deficit.

Acharya's resignation, furthermore, could be an indication that some differences still continue to exist between the apex bank and government in terms of decision making. He was, after all, seen as the last man in RBI vociferously batting for autonomy. At the very least it puts the spotlight on the Modi government's growing HR problem. There have been too many respected economists who have quit abruptly, including former Chief Economic Advisor Arvind Subramanian, Niti Aayog's Arvind Panagariya, Patel and now Acharya.

The RBI now has three deputy governors, B.P. Kanungo, N.S. Vishwanathan and M.K. Jain.

Edited by Sushmita Choudhury Agarwal

Also read: 'Govt policies like T20 match': RBI Deputy Governor Viral Acharya's speech that got him into trouble

Also read: MPC meet minutes: Economic activity clearly losing traction, says RBI Governor Shaktikanta Das