Raghuram Rajan’s Parting Gift To Urjit Patel Was The ‘Rupee’

Former Reserve Bank of India Governor Raghuram Rajan gave successor Urjit Patel a symbol of the Indian rupee, emphasising the importance of the currency to a central banker.

Rajan, who left the RBI in September last year after his term ended, gave Patel a memento with the rupee symbol that read “humaari zimmedaari” or “our responsibility” while passing on the baton, he said at a media event for the launch of his book ‘I Do What I Do’.

Bolstering the rupee was in fact one of Rajan’s first big challenge after he replaced D Subbarao in September 2013. Taper tantrum had sent the rupee tumbling after comments from the U.S. Federal Reserve on scaling down its easy-money policy led investors to rapidly pull out funds from government securities. The Indian currency fell to its lowest level against the dollar in August.

“All the metrics were looking bleak, and we were labelled among the fragile five,” Rajan said.

Rajan led the RBI in orchestrating a steady recovery in the rupee in the coming years. One of the things that worked during that time, Rajan said, was the Foreign Currency Non-Resident (Bank) or FCNR(B) scheme that the RBI implemented, offering to swap foreign currency deposits after three years at a fixed rate of 3.5 percent.

But the scheme itself was a shot in the dark for Rajan.

“The scheme was proposed by banks. Being in the RBI and finance ministry, you're always suspicious of the schemes that the banks bring to you,” he said, adding that he was “very skeptical” at first. “This to my mind was essentially a way for banks to print money for themselves.”

Rajan said that the RBI decided to go ahead with the scheme as it didn't necessarily mean a loss for the central bank. “If plenty of money came in, it would stabilise the rupee, it would appreciate after the money came in, then the RBI would hedge their exposure and not make a loss,” added Rajan.

It was a risk worth taking for the country, he said.

The RBI implemented the FCNR(B) scheme and around $26 billion worth of deposits came in and the rupee went up, partly also due to the anticipation of a new government after elections in 2014. “We actually made money on the deal,” Rajan said.

Did the scheme work? Rajan says he doesn't know. There were many elements to the scheme, he said, referring to it as a “big shotgun” that was put together. “We don't know which pellet hit the target,” he said.

Rajan also praised Urjit Patel for his report on monetary policy reformation, saying that gave the RBI a pathway for stabilising the rupee.