Raising FCNR deposits was driven by FinMin: Rajan

Raising money through foreign currency non-resident (FCNR) bonds was not the first choice for the Reserve Bank of India (RBI) in September 2013, and the central bank most definitely did not expect the scheme to have such a good response.

RBI had originally expected to raise $10 billion but eventually raised about $30 billion under the scheme.

The idea was first proposed by bankers to Raghuram Rajan when he was the chief economic advisor, but he had discarded the notion then.

But people in Reserve Bank, under then governor D  Subbarao took it seriously and wanted to act on it, RBI governor Rajan revealed at the book launch of Subbarao’s Who moved my interest rate at RBI headquarters in Mumbai.

In fact, the scheme caught the fancy of the finance ministry so much so that it actually drove the FCNR deposits scheme under which banks swapped the dollars at a subsidised rate of 3.5 per cent with the RBI.

"This was one of the situations where the finance ministry actually took the lead," Rajan told audiences in his closing remarks on the book launch.

After deciding on the contours of the scheme, Subbarao let Rajan announce it on September 4, 2013.

The RBI had originally done the cost-benefit analysis for the scheme and found the swapping would cost the central bank Rs 10-20,000 crore. But by doing so, rupee would strengthen and thus the import bill could be reduced by about Rs 1.6 lakh crore on a yearly basis.

"We said, let's take the risk," Rajan said. But for sure, it was "one of the worst ideas on the table," Rajan said, adding, "I neither invented it, nor take the credit for it."

Senior Journalists Latha Venkatesh and  Tamal Bandyopadhyay discussed Subbrao's book with the author.

Subbarao said the Reserve Bank should not be brought under CAG as the central bank is a monetary authority and should not be treated like any other public organisation.

During the discussion on RBI's accountability, Rajan was asked how the central bank was taking the accountability factor forward.

Rajan said the central bank was in discussion with the parliamentary committee to set up at least two meetings per year where the Governor will go and dispose in front of the committee.

"We just had one a month and a half ago where I and two deputy governors went before the standing committee and answered a variety of questions. Without them calling us, we set it up with them and had very frank and free interaction," he said.

"I would think that the deliberations of the committee follow parliamentary rules where they are supposed to be within closed doors. I am told there was some communication between the committee members and the press," Rajan said, adding while the conversation should be closed door, the opening statement by the Governor to the committee could be made public in future occasions. "But that is for the future Governor to decide," Rajan said.