Bimal Jalan became governor of the
Reserve Bank of India (RBI) in November 1997 amidst
the Asian financial crisis. Up to August that year,
the rupee (INR) had remained flat at around 35.75
per US$ (USD). In mid-August, a deputy governor
talked it down at a conference of money market
operators in Goa.
That and the chaos in Asia encouraged traders to
borrow and short the INR. India’s foreign currency
reserves were USD 22 billion. It fell by USD 3
billion in three weeks as C. Rangarajan, Jalan’s
predecessor at the RBI, unsuccessfully tried to hold
the exchange rate. When Jalan assumed office, the
INR-USD rate was testing 39 and looking at going to
below 40. I remember re-jigging the old Ashes ditty
to: “From crashes to crashes / Bust to bust / If
Korea don’t get you / Indonesia must.”
The traders greeted Jalan by driving the intra-day
rupee to below 40. The new governor surveyed the
situation for a while and then struck back. He
dramatically increased the short term interest rates
to force the shorting traders to make losses; and
squeezed liquidity to boot. Soon, frenetic punting
came to a halt. The INR quickly rose from a tad
below 40 to around 38.25. Having proven that he can
occasionally punish, but knowing that such
retribution can be only for the short term, Jalan
then let the INR drift. Which it did, crossing 40 in
mid-May 1998 and settling at around 42.5 by December
1998.
Why have I started with this example as Raghuram
Rajan prepares to become the 23rd governor from
September? The first is that the RBI governor is
neither Superman nor a Super-Minister. He has two
sets of instruments: those controlling money supply,
and those affecting interest rates. He can also play
a limited role in moderating excessive exchange rate
movements by trading dollars.
However, given the global scenario and bearish
sentiments about India, and that we have USD 252
billion of foreign currency assets versus short term
external debt of USD 97 billion, there isn’t much
around to make big plays by selling dollars to
arrest the falling INR. To assume that Rajan will
halt the INR’s decline and simultaneously create a
monetary stance that helps growth through cheaper
credit flows is asking for too much. From anyone.
Second, Rajan knows that if the High Command is
determined to pass the Food Security Bill (FSB),
there is nothing he can do but watch and moan. In a
well researched piece, Surjit Bhalla has estimated
the FSB in its first year to cost Rs.314,000 crore,
or 3 per cent of GDP. Even if it were halved, it
will be staggering blow to the exchequer, and
further weaken the RBI’s hand.
To maintain a sensible monetary stance that
encourages growth and discourages inflation is
difficult enough. Doing so when electoral political
can wreck the fisc makes it the toughest job in
India.
Third, more than other governors, Rajan must steer
by good sense and instinct. In difficult times, Ben
Bernanke showed exceptional qualities of being a
great monetary helmsmen. Bernanke was not pursued by
inflation. Rajan will have to reckon with that. So,
more than others, he will need intuition, knowledge
and calm to steer the ship, without any pre-set
guidebooks to consult.
Fourth, many emerging market currencies have tanked.
Between 2 April and 6 August 2013, the Argentine
peso fell by 21 per cent versus the USD; the
Brazilian real by 20 per cent; the South African
rand by 23 per cent; the Indonesian rupiah by 11.5
per cent; and the INR by 16 per cent. The USD is
moving out of emerging markets. In such a situation,
it seems foolhardy to ‘save’ the rupee from falling.
The best one can do is to occasionally temper the
fall while focusing on sensible monetary governance.
That’s a very tough act in the backdrop of fiscal
irresponsibility and political interference. Rajan
deserves all the luck in the world.
Published: Business World, September 2013