New York University Economics Professor Viral V Acharya, considered an expert in credit risk, is the new Deputy Governor in charge of the crucial monetary policy department of the Reserve Bank of India (RBI). The appointment of Acharya — a strong votary of central banks’ independence — for a three-year tenure has been cleared by the Appointments Committee of the Cabinet (ACC). He will join the RBI on January 20, 2017.
The 42-year old Acharya, who has co-authored research papers with former RBI Governor Raghuram Rajan, is taking over at a time when the RBI is facing flak for repeated changes in the rules during the ongoing demonetisation period. After Urjit Patel was elevated as the Governor in September 2016, Deputy Governor R Gandhi was looking after the monetary policy department.
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Acharya has often praised Rajan for his works and once said, “Raghu has been a great source of inspiration for me”. At a financial economics plenary lecture in 2013, Acharya had narrated an incident when someone asked him on a flight whether he was Raghuram Rajan, after seeing him, an Indian, with papers on banking and crisis. He realised that day that if he had Rajan as a “role model” and could get even 5-10 per cent of him, he could easily pass off as “poor man’s Raghuram Rajan” on flights.
Acharya completed his BTech in Computer Science and Engineering from IIT Mumbai in 1995 and PhD in finance from NYU–Stern in 2001. Prior to joining Stern, he was at London Business School (2001–2008), the Academic Director of the Coller Institute of Private Equity at LBS (2007–09) and a Senior Houblon–Normal Research Fellow at the Bank of England (Summer 2008). Acharya who joined New York University Stern School of Business in September 2008 is now CV Starr Professor of Economics. According to NYU, his primary research interest is in theoretical and empirical analysis of systemic risk of the financial sector, its regulation and its genesis in government–induced distortions, an inquiry that cuts across several other strands of research – credit risk and liquidity risk, their interactions and agency–theoretic foundations, as well as their general equilibrium consequences.
Acharya has co-authored several papers with Raghuram Rajan. “What determines the sustainability of sovereign debt? They do not default when debt is low because they would lose access to debt markets and be forced to reduce spending; they do not default as debt builds up and net new borrowing becomes difficult, because of the adverse consequences from default to the domestic financial sector. More myopic governments default less often, but tax in a more distortionary way and increase the vulnerability of the domestic financial sector to future government debt default,” Acharya and Rajan wrote in ‘Sovereign Debt, Government Myopia, and the Financial Sector’.
On the functioning of central banks, Acharya said in a paper, “issues relating to the central bank’s independence from the political establishment and to central bank governance (accountability and transparency, in particular), are often at the centre of designing the central bank’s role in financial stability. What the central bank can and cannot do to ensure financial stability is, after all, governed by the laws defining and limiting the scope of its operations. These laws, in turn, are written and subsequently implemented as the outcome of what the political process dictates.”
In another paper co-authored with Stewart Myers and Rajan, Acharya said, “we find that internal governance can mitigate agency problems and ensure firms have substantial value, even without any external governance. Internal governance seems to work best when both top management and subordinates are important to value creation. We then allow for governance provided by external financiers and show that external governance, even if crude and uninformed, can complement internal governance in improving efficiency. Interestingly, this leads us to a theory of investment and dividend policy, where dividends are paid by self-interested CEOs to maintain a balance between internal and external control.”
In a study on the performance of banks in India during 2007-09, especially on the impact of government guarantees on bank vulnerability, Acharya and Nirupama Kulkarni said: “We find that vulnerable private sector banks performed worse than safer banks; however, the opposite was true for state-owned banks. Vulnerable private sector banks experienced deposit withdrawals and shortening of deposit maturity. In contrast, vulnerable state-owned banks grew their deposit base and increased loan advances, but at cheaper rates, and especially to politically important sectors.” He is currently associate editor of the Journal of Finance (2011-), Review of Corporate Finance Studies (RCFS, 2011-) and Review of Finance (2006-), and was an editor of the Journal of Financial Intermediation (2009-12).
— With PTI inputs
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