RBI Lost its Governor on the 'Altar of Financial Stability', Says Viral Acharya in New Book

Acharya, currently a professor at NYU’s Stern School of Business, joined the RBI in early 2017 and quit the banking regulator within two years.

New Delhi: The Reserve Bank of India (RBI) lost  its governor following attempts to undermine the autonomy of the central bank, according to reports on a new book by former deputy governor Viral Acharya.

Acharya, currently a professor at NYU’s Stern School of Business, joined the RBI in early 2017 and quit the banking regulator within two years.

His new book, which will be released later this week according to media reports, comes on the heels of former governor Urjit Patel’s own book, which in part provides a glimpse of how India’s bankruptcy code was diluted by a number of stakeholders within the broader banking ecosystem.

“A complete degeneration into excessive monetary and credit stimulus that had caused the Indian financial sector to lose its stability in just the previous decade had been rendered difficult,” Acharya writes in the preface to Quest for Restoring Financial Stability in India, according to media reports.

“Nevertheless, attempts to alter the governance structure of the RBI to institutionalise such outcomes in future would have meant crossing the Rubicon and had to be foiled. As a result, the RBI lost its governor on the altar of financial stability.”

Also read: In Urjit Patel’s ‘Overdraft’, a Peek at How India’s Bankruptcy Code Was Slowly Diluted

In 2018, tensions between the Modi government and the RBI reached a tipping point – the Centre wanted the central bank to transfer ‘excess’ or ‘surplus’ capital as a dividend to the treasury, dilute certain regulatory norms and go slow on corporate defaulters.

The government also surprisingly invoked Section 7 of the RBI Act to direct the regulator to take action on certain policy matters, a rarely used step that automatically casts doubts on the independence of the institution.

While Acharya’s book is primarily a collection of his speeches, research and comments as a member of the Monetary Policy Committee, his assessment of the central bank’s performance during his time there are contained in the “lengthy preface” and the “book’s epilogue”.

According to the Economic Times, Acharya suggests that initially the Modi government and the RBI were on the same path regarding moving towards a more safe and prudent banking system – but this quickly unraveled, with some soft back-tracks on prudent measures that eventually led to Patel’s resignation in 2018.

“As financial stability often requires enduring short-term pain for long-run growth, it is not easy to be its gatekeeper anywhere in the world, and certainly not so in India,” Acharya writes.

“To the extent I had some influence as a deputy governor of RBI, I did not strike compromises on what really mattered for restoring financial stability, neither with the governors nor with the government of India. At times it wasn’t easy, but I continue to believe that it was worth fighting for. It was the right stance.”