The valedictory speech by Reserve Bank of India Governor Raghuram Rajan at a function to launch former RBI Governor D Subbarao’s memoir, Who Moved My Interest Rate?, turned out to be a rather enlightening one.

Rajan dutifully began by complimenting Subbarao for writing a thoughtful book. While many such tomes are in the ‘how I saved the world’ mould, this one was more of a ‘how I understood the world’ kind of work, he said.

Then, Rajan recounted events from three years ago, when he was Officer on Special Duty for about 20 days at the RBI before taking over from Subbarao. The rupee was very volatile and the prediction was that the unit would soon touch 100 to the dollar. Rajan decided that he needed to change the narrative and searched for ideas from various departments in the RBI to tide over the situation.

He said that among all the ideas that came in there was a “completely idiotic” proposal from bankers: “Give us a 3.5 per cent swap deal on forex swaps. Give us a 3.5 per cent subsidy, and we will bring in a whole lot of money from overseas.”

Dismissed out of hand

They indicated that they would be able to bring in about $10 billion. They had earlier pitched this idea to Rajan when he was Chief Economic Advisor at the Finance Ministry and he had shooed them away. But now, in the RBI, there was a willingness among the various top officials to look at the scheme once again.

Incidentally the Finance Ministry was also gung-ho about pushing the idea, Rajan said.

Finally, what convinced the central bank was the cost-benefit analysis. While the cost of the scheme may have been between ₹10,000 crore and ₹20,000 crore, there would be the gains of a stronger currency.

And if a gain of about ₹4 were multiplied on about $400 billion of imports, then there would be savings of about ₹1.6 trillion for the economy.

From a cost-benefit angle, this was a good option and so they decided to go ahead. Ultimately, the swap scheme brought in $30 billion, Rajan noted.

Benefit of hindsight

Rajan confessed that although he had reservations about the scheme, he has now got credit for the same and it ultimately made money. While in retrospect it may seem like a brilliant idea, people are apt to forget the uncertainty and the confusion of that period, he said.

“When we write the narrative of that period, we look back lineally and think we have a clear line. That is something only history can judge,” is how Rajan wound up the valedictory address.

Perhaps he also spelt out the appropriate epitaph for his own term.

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