August 13, 2016 3:02:17 am
Reserve Bank Governor Raghuram Rajan on Friday disclosed that he was against the foreign exchange swap scheme through the FCNR (B) window which was announced by the RBI to salvage the plummeting rupee and boost forex reserves in 2013. However, the proposal which he initially thought was “completely idiotic and a terrible, terrible thing to do” attracted inflow of $30 billion in FCNR-B deposits and propped up the rupee which was under severe pressure of the ‘taper tantrum’ in the US.
While the swap scheme was considered to be a masterstroke by Rajan who announced the step to boost the rupee on September 4, 2013, his first day in office, Rajan said, “now I get credit for the idea which actually I neither invented nor actually believed in.”
“I overlapped Dr Subbarao for 20 days when I came in as an officer on special duty. It was a subject of daily conversation that the rupee was moving a percentage and percentage and a half on a daily basis. People were predicting the rupee will become 100 by the end of the year. Different investment banks were competing to give alarming predictions,” he said after launching former Governor D Subbarao’s book Who moved my interest rate at the RBI headquarters.
“I spent my time going from office to office asking people… give me something you’re working on. Something that’s interesting that we can announce quickly. Amongst the sort of things that we proposed to do, one that I found completely idiotic and terrible, terrible thing to do was a proposal that came from bankers. Give us 3.5 per cent swap deal on foreign exchange swaps,” Rajan said.
Rajan said: “I thought this is bankers coming in again to get one of the sweet deals which will help them. They will go out and raise the money. They will get fantastic bonuses and we will end up paying for it. I said what kind of money are you talking about… $10 billion at 3.5 per cent.”
Earlier, when they came to Rajan when he was the chief economic advisor, he said he sent them away with “a flea in the ear”. Then they came to the RBI and it was forced once again. “When I was sitting with HR Khan, Vijay Bhaskar and Padmanabhan, these serious people said maybe we should start thinking about it seriously,” Rajan said.
Rajan said that he thought the idea to be “completely idiotic” as it was akin to giving 3.5 per cent subsidy to bankers and it was “the worst of the ideas on the table” which made him request Subbarao to announce it while departing. However, Subbarao asked him to announce the measures. The scheme changed the course of the rupee which was bleeding following the ‘taper tantrums’.
Rajan said on the cost-benefit analysis front, it has worked out very well and the country had made money. Against the cost of up to Rs 20,000 crore to get the deposits, the country benefited through stabilisation of rupee, which helped reduce imports by up to Rs 1.6 trillion per year through the Rs 4 reduction in the value of the rupee. “It was an important idea, we had to try because we were in a situation when we had to try something to change the narrative,” Rajan said.
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