RBI may turn more dovish after Viral Acharya’s early exit, says SBI's Soumya Kanti Ghosh

The Reserve Bank of India (RBI) deputy governor Viral Acharya has resigned six months before the end of his three-year term. In December last year, RBI governor Urjit Patel abruptly resigned and there was speculation that Acharya could follow.

Responding to a query from CNBC-TV18, Acharya said, “I have decided to leave six months early due to unavoidable personal reasons. So much to finish in the last month. I am sticking to my school teacher's advice: when your work speaks for itself, don't interrupt.”

Acharya joined the central bank in January 2017. At 42, he was the youngest to be appointed as deputy governor. Known for his outspoken views on the central bank's autonomy, Acharya delivered a speech in October last year which created a controversy.

Speaking during a tiff between the government and the RBI over the transfer of excess capital with the central bank, Acharya said: “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.”

Acharya was part of 15 rate decisions by the monetary policy committee (MPC).

Speaking of the central bank, how much capital does the RBI need? A panel under former RBI Governor Bimal Jalan was formed to answer this very question after the government invoked Section 7 of the RBI Act last year in an unprecedented move. This section empowers the government to issue directions to the central bank in public interest.

The report of this panel was expected this month, but it has been delayed yet again. The meeting of the panel was held on June 24 and where the finance secretary Shubash Garg expressed dissent over some proposals.

In an interview to CNBC-TV18, Tamal Bandyopadhyay, consulting editor at Business Standard and Soumya Kanti Ghosh, group chief economic advisor at the State Bank of India discussed Acharay’s early exit and Bimal Jalan panel's report being delayed.

According to Bandyopadhyay, Acharya's resignation as RBI deputy governor did not come as a surprise. “Dr. Urjit Patel’s exit in December was sort of a precursor that Dr. Viral Acharya would also be leaving because the so called fight for RBI’s independence, they were defending RBI and there was a clear division within the board,” he said.

Bandyopadhyay believes that RBI governor Shaktikanta Das would prefer stability at the top tier at present and would extend NS Vishwanathan’s term. “Acharya is cutting his term short in the last week of July. So, getting two new deputy governors around the same time out of four, I think it is a bit of an issue. So he is opting for a continuation of NS Vishwanathan,” he said.

“As far as Dr. Acharya’s successor is concerned, it is in realm of speculation. There are a few names doing rounds. One is, internally Dr. Michael Patra who is a part of MPC and externally we hear about Sanjeev Sanyal who is a part of North Block,” he added.

According to Ghosh the RBI may become more dovish after Acharya’s exit. “We did an analysis to find out when Dr. Acharya joined as MPC member in February 2017 till date, you will find that on most of the occasions, Acharya and Chetan Ghate have voted together, whether to cut, to hike, or to hold. So there was a significant amount of unanimity between the external director and Dr. Chetan Ghate and Dr. Acharya. In fact there was a divergence between Dr. Acharya and Michael Patra. So that indicates that with Dr. Acharya resigning from the RBI, the possibility of RBI turning more dovish cannot be ruled out. So expect that there could be some more amount of accommodation in the coming days,” he said.

“As of now we are penciling a cut in August definitely. However, given the fact that the central bank has clearly not said anything about the real interest rate or quantified and given the fact that the inflation average for the full year could be anything between 3.5 to 3.8 percent as of now, so even with a real interest rate of say 1.5 percent, that means that the terminal rate could go below 5.5 percent. So that means that apart from the 25 basis point rate cut in August, there is a possibility of further rate cut later in the year,” Ghosh added.