The last few months of former Reserve Bank of India (RBI) Governor D Subbarao, who was at the helm of affairs between 2008-2013, were most tumultuous. The value of Indian rupee against the US dollar had a free fall, touching an all-time low of 67-68 against the US dollar during August 2013.
The speculators were betting on a further fall to 70 and beyond. That was the time when celebrated economist Raghuram Rajan, who was then the chief economic advisor to Finance Ministry, was dispatched from New Delhi to douse the fire. And Rajan, who succeeded Subbarao in September 2013, did stabilize the rupee value by announcing host of measures, the most prominent being allowing banks to raise foreign currency deposits abroad.
The scheme was a huge success bringing close to USD 30 billion dollars into the country. The rupee, which is now at 64 levels, hasn't seen the kind of sharp depreciation it saw in the 2013 period.
So what really happened behind the closed doors to arrest the rupee fall?
D Subbarao's book 'Who moved my interest rate?" which was published last year, hinted that that Raghuram Rajan as chief economic advisor to finance ministry was actively involved in dousing fire which refused to calm down under his tenure.
"In fact, as chief economic advisor to the government, Raghu was on board all through the exchange rate turmoil," Rajan, who took over as chief economic advisor in August 2012, was actually working very closely with then Prime Minister Manmohan Singh and finance minister P Chidambaram. There is every possibility that Subbarao must have discussed the likely measures with the finance ministry.
Rajan's book 'I Do What I Do', which has hit the stands this month has no mention of Subbarao as part of the deliberations to announce the big measure of allowing banks to raise foreign currency deposits. "Having obtained the concurrence of the finance ministry, the RBI Governor had to decide. I choose to go ahead with it," says Rajan in his book.
Subbarao's book has more detailed version: "As we approached the close of my term in the first week of September, Raghu and I had both agreed that the next steps should be to open a special forex window for the oil companies and incentivize our commercial banks to raise tier-2 capital through their branches and subsidiaries abroad, and swap the dollars for rupees with RBI at a premium.
Raghu was kind enough to offer that I announce these measures before signing off. But I thought that the measures would be more effective if he announced them as the incoming Governor. At least on this issue, my judgment worked!" wrote Subbarao.
Was Subbarao reluctant to announce such measure because it had risks, too, and hence threw the ball on Rajan's court? Rajan hints in his book that the bottom line was that the scheme was a measured risk, with a probability that the RBI would lose money, certainty that the bankers would make money, but also a reasonable chance that the country would be significantly better off. "Policy making is about deciding in the face of uncertainty, after weighing the alternatives as best as one can," Rajan wrote.
The two authors also have a different take on the recovery of the rupee value post the measures. Subbarao's book talked about the several factors that helped the recovery of the rupee starting early September. "By far the most important was that the adjustment had run its course. Second, the risk of a flare-up in Syria abated. Third, the Fed announced that it was postponing the taper indefinitely," Subbarao wrote in his book. There were no credit to RBI or the government for the measures they took.
Rajan in his book says in hindsight it seems like it (dollar deposits by banks) was the obvious thing to do because it worked. "The reality is we will never know for certain whether it was the key! Perhaps it was the other elements of the package such as the determination we expressed on controlling inflation, perhaps it was everything together," he wrote while adding, "Autobiographies are always written as if the author had it all mapped out with perfect foresight, ignoring the risks and uncertainties at that time."
"Policy making invariably involves taking measured risks in the face of uncertainty, for one has neither a prior template nor the luxury of indecision," writes Rajan.
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