The finance ministry under the then finance minister Arun Jaitley had decided to seek explanation from RBI deputy governor Viral Acharya on his controversial ‘wrath of the markets’ speech but refrained from issuing the letter to him, said ex-finance secretary Subash Chandra Garg in his book.
Achrya later resigned six months ahead of his three-year tenure for ‘personal reasons’, said the book titled ‘We Also Make Policy: An Insider’s Account of How the Finance Ministry Functions’.
Garg in his book said that Acharya had used false data to bring home the point that governments that do not respect central bank independence sooner or later incur wrath of financial markets.
“Governments that do not respect central bank 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; their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors and longer lifespans,”
Acharya had said in a lecture in Mumbai in October 2018 when the tiff between the government and the RBI was at its height.
“Viral Acharya used data from the sovereign bond markets of Argentina to make the point that bonds were sold off and yields and credit default swap rates rose massively when the governor (Martin Redrado) of the central bank resigned in the wake of the government’s interference,” Garg said in his book published by Harper Collins.
However, Garg said, the ministry examined the data used by Acharya in his lecture and found to be inaccurate.
“Dr Viral Acharya had used false data to make his point about the so called parallels between Argentina and India. This was not expected from a researcher of his stature. He had also delivered an incendiary speech, probably with no parallel in the annals of central banking, knowing well that the speech could further spoil the relationship between the government and RBI,” the book said.
Finance minister Arun Jaitley was also shocked when he was apprised of the data. With his consent, it was decided to call for an explanation from Acharya, it said, adding, a letter was drafted that basically contained four allegations.
“First, Viral Acharya delivered a public speech on theme ‘On the Importance of Independent Regulatory Institutions: The Case of the Central Bank’ on October 26, 2018, which created a strong impression in India in the media and the minds of economic and financial analysts, participants and commentators that the independence of RBI was under threat, as a result of the Government of India allegedly taking measures to stifle its independence and taking measures to raid the reserves/buffers built in the balance sheet of RBI,” Garg wrote.
Second, he said, the language used in the lecture was unusually incendiary/fiery, which was very unusual for a central banker, and accused the government of having a short-term perspective and mindset, brandishing it as unfit to take policy decisions of a long-term nature.
Further, all these accusations were made in public without even first bringing them to the notice of the government and discussing the same, he said.
Third, he said, Acharya used false data to make his points and finally making a false accusation that the Government of India was trying to raid RBI’s reserves despite knowing fully well that the government had made no such move and no such proposal was made or direction issued to this effect to RBI.
It was proposed in the draft letter that Acharya provide the proof of his research and the actual source of the data he relied upon to reach the conclusion that Argentine sovereign bond yields spiked by as much as a fourth after Redrado’s resignation.
Further, Garg said, it was proposed that Acharya be asked to explain why he used a media/agency report, which was nothing more than a false rumour as the reason to use intemperate, incendiary, half baked, emotive and harsh language in his speech.
However, he said, this letter was never issued and the file remained in the custody of Arun Jaitley for some time before the matter died in due course.
Subsequently, he said, Acharya put in his papers six months in advance of the completion of his three-year tenure in July 2019 for ‘personal reasons’.
Recently Acharya in his updated edition of his book said that the RBI resisted a “raid” planned by some in the government to extract Rs 2-3 lakh crore from its balance sheet in 2018 to meet populist spending in run-up to general elections.
This apparently had led to differences between RBI and the government, which even contemplated invoking never-used Section 7 of the Reserve Bank of India Act to issue directions to the central bank.