Viral Acharya quits RBI: Implication for monetary policy, reforms, markets

The resignation of Reserve Bank of India’s (RBI’s) deputy governor Viral Acharya six months ahead of the scheduled completion evoked mixed reactions from experts, especially at a time when the financial sector has seen a number of developments over the past one year.

In the past three years, the central bank has seen the sudden exit of Raghuram Rajan and Urjit Patel as RBI Governors, and now Viral Acharya as its Deputy Governor, who was in charge of the Monetary Policy Department and the Department of Economic and Policy Research, among others.

“Dr. Acharya’s departure is not a complete surprise, as frictions between him and the government on issues related to central bank independence had come to the fore,” wrote Sonal Varma, managing director and chief India economist at Nomura in a co-authored report with Aurodeep Nandi.

While the process of finding a successor should get underway soon, Sanjeev Sanyal, principal economic advisor in the Ministry of Finance, and Dr. Michael Patra, RBI monetary policy committee (MPC) member are the two possible contenders, reports suggest.

“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. 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,” say Varma and Nandi of Nomura.

On the other hand, Madan Sabnavis, chief economist at CARE Ratings says the development does come as a surprise and the RBI must hasten the process of finding Dr. Acharya’s replacement. The extension Deputy Governor N Vishwanathan's term could provide continuity to the existing policy and the structure at the central bank, he believes.

“We need quick action to find a replacement. Dr Acharya's position is one reserved for an economist and plays crucial role in MPC member role. His term has been eventful, as it merged with working of MPC and giving shape to same. Hence, we do require someone with strong monetary policy understanding. That said, maybe there is no need for two new deputy governors at the RBI,” Sabnavis says.

Going ahead, analysts at Nomura expect the RBI’s MPC to cut repo rate by 25 basis points (bps) in its next meeting in August, resulting in a cumulative 100 bps, or 1 per cent, cut in 2019. This, they say, is possible as they expect inflation to remain below the targeted level of 4 per cent amid lacklustre growth.

“If growth concerns escalate beyond that, either due to marked global slowdown or shadow banking crisis, we believe the MPC may agree to ease further, although not our base case currently,” Nomura says.

MARKETS: THE ROAD AHEAD

Equity markets seem to be unfazed by the development at RBI and now look to other cues for direction, such as the upcoming Budget in July, progress of monsoon, key economic data and global factors.

“Economic data and global cues should guide markets from here on. The liquidity-related issues should ease going ahead, especially after the outcome of the general elections and that should be a positive signal for the markets. We expect the RBI to cut rates by 25 bps in August and the markets are already factoring this in at the current levels, says Vaibhav Sanghavi, co-chief executive officer, Avendus Capital Public Markets Alternate Strategies.