Source: ICICI Pru AMC
Source: Mahesh Murthy
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Incumbent RBI governor Raghuram Rajan, who was then an officer on special duty in the RBI, recounted that among all the ideas in 2013 was also an “idiotic one”.
This was to entice dollar inflows into India, by offering subsidized protection against rupee depreciation. This would provide comfort to foreign investors.
The forward cover (or full insurance cost) on the rupee-dollar was about 7% per annum, of which the RBI could cover 3.5%. Assuming an inflow of $10 billion, over a three-year period, this could easily cost the RBI and the exchequer between Rs.10,000 crore and Rs.20,000 crore.
Seemed like a crazy and expensive idea.
But slowly it gained traction, since if the rupee didn’t stabilize, the nation would lose much more by way of a higher import bill. For instance, a Rs.4 fall on an import bill of $400 billion leads to an extra outgo of Rs.1.6 trillion.
So, reluctantly, Rajan signed on to the crazy idea. And lo and behold, this turned out to be the prize-winning trick. The nation received more than $30 billion. Not only did the rupee stabilize and strengthen, but three years later, the RBI ended up making a profit on its forward deals. It had shored up adequate reserves in forward purchases to provide for the repayment that will be due next month. So, an idiotic idea worked because it was an intelligent gamble, which paid off.
It was Subbarao’s magnanimity to let Rajan make the announcement of this dollar scheme in 2013. And Rajan, who got much credit for saving the rupee, was humble and gracious to admit that he initially thought the idea was idiotic. The noble actions don’t just speak about the personalities, but are also the hallmark of the institution and its maturity, which at 81, is older than the republic!
-By Ajit Ranade
Some stuff I am reading today morning:
India-The Giant Awakens (Aberdeen)
RBL Bank’s IPO subscribed nearly 70 times (FE)
Amitabh Bachchan’s stock market bets (ET)
Capital mis-allocation by Indian companies (Bala)
Why a surging stock market is not making ordinary investors happy (Guardian)
The only thing that can save your retirement (DR)
Survivorship Bias (Stock Charts)
Why Dividend Growth Investing? (Reality Check)
Ferraris,Fine Wines and Alternative Investments (MF Blog)
Passive investing is worse than Marxism (Bloomberg)