Arvind Subramanian’s Dream

Hat Tip : Anantha Nageswaran

I have a dream. Perhaps it is a nightmare. 

There is a public event and on one side of the stage are lined up Messrs Bimal Jalan, C. Rangarajan, Y.V. Reddy, D. Subbarao, Rakesh Mohan, Raghuram Rajan, Urjit Patel and Viral Acharya.

I am alone on the other side.

I am being lectured on the RBI’s balance sheet by this eminent group of current and former RBI officials, and the hordes—especially the fawning elites in journalism, TV, financial community, etc.—are cheering them on. 

One of the group lectures me that I don’t understand monetary economics because transferring excess capital would increase inflation, forgetting that he too made my case when he was in my job.

Another asks how I dare raise such a proposal to raid the RBI and destroy a great public institution.

Yet another harangues that I am just another Ministry of Finance lackey.

I respond with my arguments.

The eminences are dismissive.

Suddenly Ben Bernanke and Mario Draghi appear.

They had been bold in deploying their balance sheets during their respective financial crises, taking risks that eventually paid off.

I appeal to them.

They examine the case and pronounce their verdict. ‘This is such a no-brainer,’ they say. ‘Obviously, you should do whatever it takes.’


From Arvind Subramanian’s Book ‘Of Counsel : The Challenges of Modi-Jaitley Economy (Chapter 2.2, page 75)

The mature wise RBI

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