The finance ministry, headed by former finance minister Arun Jaitley, intended to request an explanation from RBI deputy governor Viral Acharya regarding his controversial ‘wrath of the markets’ speech. However, they ultimately decided not to send the letter, as revealed by former finance secretary Subash Chandra Garg in his book.

In his book titled ‘We Also Make Policy: An Insider’s Account of How the Finance Ministry Functions’, Garg mentions that Acharya resigned six months ahead of completing his three-year tenure for ‘personal reasons’.

Garg further states in his book that Acharya used inaccurate data to highlight the point that governments that disregard central bank independence will ultimately face consequences from financial markets.

“Acharya had said in a lecture in Mumbai in October 2018, when the conflict between the government and the RBI was at its peak, ‘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’,” Garg wrote in his book published by Harper Collins.

Garg added that the ministry examined the data Acharya used in his lecture and found it 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 stated.

The finance minister, Arun Jaitley, was also surprised when he became aware of the data. With his consent, it was decided to seek an explanation from Acharya. A letter was drafted containing four allegations:

“First, Viral Acharya delivered a public speech on the 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.

Secondly, Garg mentioned that the language used in Acharya’s lecture was unusually fiery, especially for a central banker, and accused the government of having a short-term perspective and mindset, deeming it unfit to make long-term policy decisions.

Garg further pointed out that all these accusations were made publicly without being brought to the government’s attention or discussed beforehand.

Thirdly, Garg stated that Acharya used false data to support his arguments, including making a false accusation that the Indian government was attempting to utilize RBI’s reserves. Garg clarified that the government had made no such move or proposal to RBI.

The draft letter proposed that Acharya provide evidence of his research and the actual source of the data he relied upon to reach the conclusion that Argentine sovereign bond yields had spiked after the resignation of Martin Redrado, the governor of the central bank in Argentina.

Garg also suggested that Acharya should explain why he used a media/agency report, which was nothing more than a false rumor, as the reason to use intemperate and incendiary language in his speech.

However, Garg revealed that the letter was never issued, and the file remained with Arun Jaitley for some time before the matter eventually died down.

Subsequently, Acharya resigned six months prior to completing his three-year tenure, citing ‘personal reasons’.

In a recent updated edition of his book, Acharya claimed that the RBI resisted a planned ‘raid’ by some government officials in 2018 to extract Rs 2-3 lakh crore from its balance sheet for populist spending in the lead-up to general elections. This allegedly led to tensions between the RBI and the government, which even considered invoking the previously unused Section 7 of the Reserve Bank of India Act to issue directives to the central bank.