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)
(To know Aberdeen’s portfolio in India,subscribe to our Investor Wisdom Newsletter)
India has come a long way in the last 25 years. In 1991, India undertook reforms out of necessity – the country was on the brink of default and international ignominy. This time round, India is in far better shape and reforms have been implemented out of design, rather than need.
In less than two years, Modi’s government has transformed India’s political and economic landscape. Almost every week, we see seemingly intractable problems overcome by ever more innovative solutions. In particular, the shifting of power to the states has proven to be the most politically expedient way to resolve the longstanding issue of land reform.
Through the government’s initiatives, vital infrastructure is being built, business is becoming easier to do and corruption and bureaucracy are in decline. Indian companies will soon be able to access the global market for goods and services. India’s many young entrepreneurs will have the opportunity and incentives to realise their aspirations.
Contrary to some reports, Modi remains popular and reforms have not run out of steam. If one looks closely, changes are taking place everywhere. Indeed, reforms were always intended to be long-term in nature, rather than big bang.
India is a huge country, where traditions and ways of doing things are strongly rooted in the past. Goading a huge elephant in the right direction is hard work and takes time.
Transformations have been taking place amid a marked decline in the oil price. For a large net importer, this has been a boon for the Indian government, although exports to hard hit oil-exporting countries have fallen. The government needs to capitalise on its improved fiscal standing to boost much-needed investment.
Untapped rural regions are where growth will make the most difference. Currently, rural consumption is weak, hit by back-to-back deficient monsoons and with minimum support prices for agricultural commodities having fallen. But in the longer-term, rising incomes and the potential for urbanisation signal massive growth potential. All Indians can expect a brighter future replete with opportunity.
India’s report card is not perfect, however. There is significant room for improvement on efforts to boost international trade. As India grows, it will have to adopt a more outward-looking mindset as trade makes up a larger proportion of its economy. ‘Make in India’ and ‘Digital India’ will only underline the importance of trade to future development.
At a more fundamental level, India needs to do more to help its poor gain adequate access to healthcare and education. Efforts to champion a free and fair society, which does away with the social hierarchies and prejudices of the past, need to maintain momentum. Such outdated modes of thinking are not only cruel but also a barrier to progress. Including this massive pool of talent and labour in the development process will improve overall prosperity immeasurably.
But as we’ve seen so often, India has found solutions to the challenges it has faced and emerged better for it. Indians are, if nothing else, creative and persistent.
These attributes will be needed now more than ever. For a country that was one of the world’s pre-eminent superpowers, the Hindu tradition of viewing history as a series of repeating cycles is rather apt.
All eyes will be on India as the giant awakens.
-from Aberdeen Asset