The importance of Viral Acharya

The Reserve Bank of India (RBI) deputy governor Viral Acharya’s decision to quit six months ahead of his tenure is not entirely unexpected but is nevertheless concerning. Despite his statement that he is quitting for pressing personal reasons, doubts persist that the personal reason emanated from professional discomfort.

When CNBC-TV18 requested an interview, Acharya replied: Sticking to my  school teacher’s advice: when your work speaks for itself, don’t interrupt.” So let us interpret Acharya’s work at the RBI. The deputy governor’s first speech at IBA in February 2017 flagged the Patel-Acharya approach to NPAs. In the months that followed, the RBI sent 12 largest defaulters to the bankruptcy courts and then 30 more by end of the year.

The RBI also sentenced ten large banks to “prompt corrective action” because of high NPAs and low capital, thus barring them from lending below investment grade. The resentment from corporate borrowers and bankers was severe, but one year on, most experts would agree that the RBI and its deputy governor were right to insist on fully recognising NPAs, providing for them and then capitalising banks for growth. Had the RBI not persisted with strict PCA rules, banks would probably have postponed NPA recognition, even created more NPAs while the government probably would never have arranged for the capital. The NPA mess would have gotten worse.

One year after his maiden speech, Acharya again spoke at the FIMMDA (Fixed Income and Money Market Dealers Association) chiding bankers for investing the flood of deposits that came during demonetisation in long dated paper and not even hedging their risk. For bankers  who were yearning for forbearance on mark-to-market losses, this was bitter pill.  but for the country and its banks this is sage advice: bankers have a responsibility to correctly price risk, especially risk from spendthrift governments.

The biggest bone of contention between Acharya and the government-cum-corporate lobbies was his conservatism on interest rates. Even as the RBI has cut rates three times this year, Acharya has been the last and least to be convinced of the space for lower rates. The position of the hawks ( Acharya and Chetan Ghate) in the monetary policy committee has been clearly weakened by headline inflation falling repeatedly below the RBI's estimates as also by the global fall in yields.

Yet, precisely because the consensus in favour of lower rates is reaching deafening proportions, Acharya’s position becomes more important. His argument that the fiscal deficit is understated because government is borrowing more through state-owned companies needs to be heard loud and clear.

The borrowing by the Food Corproation of India has hit Rs 1.96 lakh crore and much of this is unpaid food subsidy. FCI will be able to honour its loans only by taking more loans, and the day of reckoning will soon come for FCI and for the banks who are merrily bankrolling this behemoth. One day the money has to be paid. The nation is already paying dearly for bankrolling the dud loans of state discoms. As Acharya points out, fiscal deficit including  public sector borrowing is close to where it was in 2013, the taper tantrum year. A spike in crude prices now, say due to geopolitical reasons, can lead to a replay of a 2013-like instability.

And this is why the likes of Acharya are needed. To speak truth to power. To boldly dissent when the world is way too one-sided. To alert the country to macro imbalances which governments are likely to overlook.

To be sure Acharya and his ilk in the RBI and the MPC can be held guilty for over estimating inflation and keeping rates and liquidity a tad too tight for a tad too long. May be Acharya, like his former boss Urjit Patel, was a tad too obdurate on the pace of cleaning banks. Also Patel and Acharya did not have the knack of convincing the political leadership, that they are implementing the government’s programme, and strategically retreating when the government is unwilling to back them. This tact is as important for central bankers as is their knowledge of finance and  economics.

The polemics of the RBI-government relationship apart, Acharya’s value lies in raising the standards of independent thinking, of speaking out what he believes to be right and acting in line with his beliefs.  Even if one disagrees with his views, such courage deserves appreciation. It is possible that a few years from now the country will realise the worth of both Acharya and the values he stands for — independent central banks, fiscal discipline, responsible banking and robust debt markets.