Monetary policy could now become formality

Viral Acharya’s abrupt decision to tender his resignation raises the same questions which were asked following Urjit Patel’s departure in late 2018.

Is Prime Minister Narendra Modi’s government encroaching upon the central bank’s independence, so much so that officials prefer to leave the organisation altogether?

Has the government-versus-RBI tussle finally ended, with the former emerging victorious, but in the process undermining the reputation of the central bank?

While questions such as these have to be seen through the prism of the personal reasons cited by both Patel and Acharya, there is no denying that their exits will influence policy to an alarming extent.

The effect has probably been most telling when it comes to monetary policy. Patel’s departure and the appointment of former economic affairs secretary Shaktikanta Das as governor has been followed by three consecutive rate cuts.

In the 15 policy meetings he was a part of, Acharya voted for a rate cut on only two occasions. What is easily forgotten is that he voted for a rate hike also on just two occasions.

While that may not be the textbook definition of a balanced monetary policymaker, the dovish leanings of his fellow members made Acharya resemble an extreme hawk.

Acharya, along with external member Chetan Ghate, was never completely convinced by the durability of disinflation seen over the last few quarters. Given the upside risks, Acharya was loath to even ease the repo rate earlier this month, saying in his statement that he was doing so with some hesitation.

Unless Acharya’s successor is of a similar mind and joins Ghate in looking beyond the immediate forces controlling inflation, predicting monetary policy will be far more straightforward now.

While this in itself is not detrimental to the economy, it does make the Monetary Policy Committee redundant. Why should the committee sit for three days and decide the outcome when it is seemingly four members versus one? Without Acharya, the committee will be a lop-sided one, tilted almost completely in favour of those who prefer easier monetary conditions.

By Siddharth Upasani

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