(Bloomberg) -- Viral Acharya will be ending his stint as deputy governor at the Reserve Bank of India with a sense of unfinished business, particularly involving the central bank’s autonomy and the health of lenders.

References to these are littered across half of Acharya’s 14 speeches as a central banker, where he uses the word “capital” more than 150 times to drive home his point: against the government’s attempts to dip into the RBI’s capital reserves, and to urge Prime Minister Narendra Modi to hasten recapitalization of India’s struggling state-run lenders.

So far, his calls have gone largely unheeded. A central bank-appointed panel is set to recommend that the RBI transfer some of its surplus reserves to the government over time, while public-sector banks are likely to receive a gradual injection of $10 billion in capital amid a push to merge weak lenders with stronger ones.

In one of his latest speeches in October last year, Acharya, who declined to be interviewed for this story, suggested that that may be a wrong approach. He cited evidence from abroad to show that weak banks remained vulnerable to future shocks. Moreover, merging them with strong lenders risks weakening the acquirers, he warned.

‘True Test’

Acharya’s boss at the central bank, Governor Shaktikanta Das, says a continuous and prolonged dependence on the government’s capital infusion into banks can breed inefficiency.

“The true test of efficiency of a public sector bank is whether they are able to access capital markets to raise additional capital,” Das said in an interview to Bloomberg News.

Acharya, who had requested to leave the central bank by July 23, will return to the New York University Stern School of Business, where his main research interest is financial risk and its genesis in government-induced distortions.

Government’s Ire

Toward the end of his tenure, Acharya was at the receiving end of the government’s ire. That came after he delivered a hard-hitting speech on Oct. 26 where he brought bare the differences between New Delhi, which wants a greater share of the central bank’s capital reserves, and the RBI. Soon after, Urjit Patel who had encouraged Acharya to speak on central bank autonomy, resigned and was replaced by Das, an ex-bureaucrat.

With India preparing its first-ever overseas sovereign bond issue, upholding central bank independence might be even more paramount than ever before.

“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,” Acharya said in the October speech. “Their wiser counterparts who invest in central bank independence will enjoy lower costs of borrowing, the love of international investors, and longer life spans.”

To contact the reporter on this story: Anirban Nag in Mumbai at anag8@bloomberg.net

To contact the editors responsible for this story: Nasreen Seria at nseria@bloomberg.net, Jeanette Rodrigues, Karthikeyan Sundaram

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