Can Viral Acharya, RBI’s new deputy governor solve Mint Street’s communication block?

It’s been only a few hours since his name was announced as the new deputy governor of the Reserve Bank of India (RBI) in charge of monetary policy, but Viral Acharya is already a star. Media reports describe him as ‘Poor man’s Rajan’, picking the phrase from one of his old interviews, while some wrote about how the cricketer, singer and poet Acharya also has a music album to his credit.

The newfound stardom and fanfare accompanying Acharya in Indian media reminds one the initial days of Raghuram Rajan, former RBI governor, who was often called as a ‘rock star’ governor of Mint Street and James Bond who’s put the “sex” back into the Sensex’. At 42, Acharya, is the youngest deputy governor of the RBI. One needn’t be surprised if he morphs into a ‘junior rock star’ in media.

Viral Acharya – RBI Deputy Governor. Image courtesy – NYU-Stern.

But once the welcome party is over, there is a trial by fire awaiting Acharya, who is entering the RBI at a time when the economy is fighting a self-imposed demonetisation crisis and the central bank itself is fighting a major trust deficit and credibility crisis, due to the way it has handled the Modi government’s decision on the evening of 8 November to demonetise Rs 500 and Rs 1,000 currency notes.

Acharya needs to hit the ground running making the RBI’s voice heard in the monetary policy committee (MPC) on the course of interest rates in a challenging economic scenario. Since there is already an MPC with experts in place, Acharya’s task wouldn’t be too tough as in the old days when the monetary policy was solely the central bank’s responsibility.

Nevertheless, there is likely to be pressure from the ruling political dispensation for steeper rate cuts in the backdrop of a sharp decline in economic growth due to the demonetisation-induced cash crunch.

The RBI itself has lowered the GDP forecast for the fiscal year 2017 to 7.1 percent from 7.6 per cent while forecasters have gone even more pessimistic forecasts (one even predicted 3.5 percent for current year).

Acharya isn’t a big fan of ultra-loose monetary policies though. He believes such a policy stance ,when introduced in a weak banking system, can turn out to be disastrous. In an interview given to Bloomberg Quint, Acharya had said, “We are yet struggling to figure out what the global economies are from the ultra-loose monetary policy. Whereas, now we are seeing emerging evidence of the unintended consequences that these policies have had. So, the biggest problem that I worry with low interest rates is when parts of your banking sectors aren’t healthy; it’s a recipe for disaster.” This was in the global context, but applies to India as well.

On the bad loan issue, one of the big headaches for India’s policymakers, Acharya had made two important remarks in the same interview.

First, to hive off bad loans into a separate entity. Acharya had said that Indian banking system need to create a bad-loan bank to separate the good assets from the bad. “I am absolutely proposing, either explicitly or implicitly, that we separate the unhealthy parts of the troubled banks from the healthy parts,” Acharya said.

Secondly, he warned that taking profit from the RBI and using it for the recapitalisation of state-run banks is a solution to the capital problems of India’s PSU banks.

“I don’t think half-baked solutions like taking the RBI’s profits and putting them into public sector banks is the way to go. I think that is just like putting on a band aid and actually it’s a pretty bad band aid in my opinion, because it, kind of, distances the fiscal authority from the monetary, it reduces the distance of the two. It, kind of, almost says that central bank should generate profit because you have to recapitalise the public sector. Everything smells wrong about it.”

Interestingly, one of the thought processes within the Modi government when it announced demonetisation was that the exercise will create some fiscal boost in the form of a ‘windfall’ profit from the RBI when its currency liability goes down.

The idea didn’t work since most of the money demonetised returned to the banking system and RBI governor Urjit Patel clarified that there is no such plan to transfer a one-time surplus to the government on the cards. India’s PSU banks are reeling under heavy bad-loan burden (totalling Rs 6 lakh crore as on September) and need huge capital to meet their Basel-III credit requirements, credit expansion needs and bad loan provisioning.

In a research paper co-authored with Krishnamurthy V. Subramanian of Indian School of Business — State intervention in banking: the relative health of Indian public sector and private sector bank — Acharya had said that many of the problems faced by Indian public sector banks are due to their lack of efficient human resources (he cited the P J Nayak committee report here), their inability to adapt to a rapidly changing technology and the issue of dual regulation of these banks by both the RBI and finance ministry. In the paper, Acharya strongly advocated that in the due course some of the public sector banks will have to by privatised.

“Over the long run, some of the public sector banks can be privatised or their assets reallocated. Some of them could be acquired by the relatively well-capitalised private sector firms; the ones with worst asset quality could be wound down; and, greater entry of smaller and newer banks can be enabled to yet maintain healthy levels of competition,” Acharya said.

As Patel’s deputy in charge of monetary policy, there is no clarity whether Acharya will have a say in the bad loan resolution issue. But, if he continues to argue for some of the above recommendations in the past, he may run into trouble with the government, especially on the issue of using RBI profit to recapitalise state-run banks.

But, beyond these two issues — monetary policy and banking sector NPAs — what one needs to watch is whether Acharya can offer a solution to the communication block the Reserve Bank is suffering ever since Patel took over as RBI governor. Over the years, especially during the tenure of Raghuram Rajan, the RBI has taken serious efforts to improve the central bank’s communication to the public also using public engagements of the RBI top brass to converse and clarify key policy decisions with various stakeholders. This was done with the assessment that effective communication is equally critical for a central bank as much as taking policy decisions.

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But, arguably, the RBI under Patel has been a failure to carry forward this effort, especially during the demonetisation rollout. Former RBI deputy governor, Usha Thorat, in a column in The Indian Express, criticised the RBI for not communicating to the desired extent on certain critical aspects of demonetisation. “The RBI top management must communicate more through the media and speaking opportunities. This is necessary in the interest of transparency and credibility. It generates confidence that the RBI believes in honest communication,” Thorat said. Governor Patel’s prolonged silence since 8 November, despite uncertainty on cash crunch gripping the public, had attracted strong criticism.

Can Acharya, an articulate academic, fill the void of the effective communicator in the central bank? “Perhaps he can,” said Gaurav Kapur, an independent economist. “ Not just on the demonetisation issue, but on other policy decisions as well. Acharya can be the person to communicate the RBI’s policy decisions more effectively, which was largely missing during the demonetisation episode,” Kapur said.