Acharya follows Dr. Raghuram Rajan and Urjit Patel, both of who left the central bank after advocating strong measures to clean – up the banking system, introduce new ideas such as inflation targeting and fought for central bank independence.
The New York University professor who became the youngest to become a deputy governor has been a strong advocate of conservatism when it came to either monetary policy or dealing with financial markets.
When the RBI and the Government were indulging in war of words over transfer of excess capital and letting state – run banks off the hook for their bad finances, Acharya was in his elements to defend the central bank’s role.
Drawing examples of ruin and threat from former Argentina’s central bank chief, who quit in the dispute over the transfer of reserves, to the Turkish debacle and the US president’s public criticism of their central banks’ actions, Acharya had said undermining the regulator’s independence could be `catastrophic.’
“A government’s horizon of decision-making is rendered short, like the duration of a T20 match (to use a cricketing analogy), by several considerations,’’ Acharya said last October. “There are always upcoming elections of some sort – national, state, mid-term, etc. In contrast, a central bank plays a Test match, trying to win each session but importantly also survive it so as to have a chance to win the next session, and so on.’’
He strongly argued against the government’s plans to form a separate payments regulator which would weaken the entire payments system.
“Setting up parallel regulatory agencies with weaker statutory powers and/or encouraging development of unregulated (or lightly regulated) entities that perform financial intermediation functions outside the purview of the central bank,’’ undermines the central bank independence, said Acharya.
After the exit of Patel, Acharya’s was probably the lone conservative voice in the RBI on policy issues such as easing of Prompt Corrective Action that led to many weak state-run banks begin lending again.
“When the government is seen often making efforts to dilute the central bank’s policies and effectively coercing the central bank into such dilutions, banks and private sector spend more time lobbying for policies that suit them individually, at the cost of collective good, rather than investing in value creation and growth,’’ Acharya had said.
Patel quit last December after constant hectoring from the bureaucracy over the transfer of excess capital to the government from the RBI and a special bail-out package for Non – Banking Finance Companies.
“Recourse to such asymmetric options – heads I win, tails the regulator dispenses – is akin to the use of steroids,’’ said Dr. Acharya. “They get addictive and have long-term adverse effects in the form of frequent relapse even though their use may be justified to relieve occasional intense pain. Hence, it would be better for the banking system to build its own immunity and strength.’’
Although the MPC had started cutting interest rates this year, Dr. Acharya has been reluctant to vote for it, though he did so in the last policy review with reluctance which he explained with borrowed lines from Ernest Hemingway.
“Why do old men wake so early? Is it to have one longer day?” wonders Santiago, the old fisherman, in “Old Man and the Sea” by Ernest Hemingway. I found myself preparing and writing these minutes early too, perhaps so I could have one longer drafting day!
Market is sensing that there could be changes in the way MPC conducts itself from now on.
“At the margin, the composition of the MPC will likely become incrementally more dovish, in our view, as Dr. Acharya stood on the more hawkish side of the policy spectrum,’’ says Sonal Varma at Nomura Securities. “Dr. Patra’s views are well known, while Sanjeev Sanyal has argued for lowering the cost of capital in the past. Other candidates could be discussed in coming days.’’
The latest difference between the academic Acharya and the establishment was the state of government finances.
“There is, however, an important upside risk to RBI’s projected inflation trajectory that I wish to highlight in particular – that of fiscal slippage,” said Dr. Acharya in the minutes of the MPC meeting released today. “Correct economic measurement of the fiscal slippage should factor in the implications of a rising PSBR (Public Sector Borrowing Requirement) rather than rely solely on the consolidated fiscal deficit figures.”
But his boss Governor Das had said that government had maintained its fiscal promise and argued that it would be a mistake to club the borrowings of state-run enterprises into that of the sovereign as they have their own revenue stream from which they could pay out.
“Over the last few years, the Central Government has by and large followed a policy of fiscal prudence,” Das has said. “It has adhered to the fiscal deficit glide path in the last 5 years, though at a somewhat slower pace than committed earlier. Public sector borrowing includes several public sector enterprises which have their own revenue streams to service their debt and take care of their liabilities. Borrowings by such public sector enterprises are mostly for capital expenditure. Hence, such borrowings should be viewed differently.”
Acharya, known as chota Rajan, would join the ranks of Indians like Raghuram Rajan and Arvind Subramanian in returning to academics after a short engagement with Indian institutions.