How Rajan went ahead with bankers' proposal for FCNR deposits

Moneycontrol BureauOutgoing RBI governor Raghuram Rajan’s last public speech at St Stephens College, New Delhi once again affirmed his credentials as a speaker who could never be boring. In his usual school-masterly style, he touched upon the reasons why some of the decisions he took as the governor were unpopular or hard to explain.

As an example, he talks about how, after he assumed office, bankers had approached him with an idea to bolster their deposits. They wanted to bring in dollars as Foreign Currency Non-resident Deposits, which they would then convert into rupees and invest in India. In return, the bankers told Rajan, they wanted a cheap rate at which they could convert the rupees back into dollars after 3 years -- when they come up for redemption. So long as the Reserve Bank of India could be trusted to provide the forward dollars, this was a great deal for the banks, says Rajan. The banks could get interest income and a guaranteed cheap price at which they could swap maturing rupees back into dollars.

But there were uncertainties. What if the rupee plunged after the dollars flowed in? However, Rajan decided to go ahead and allow banks to rope in money through FCNR deposits.

Rajan mentions how the FCNR scheme drew in USD 26 billion, ‘more than any of us anticipated’. The rupee also behaved, continuing to strengthen.All in a day's work for Rajan.