Monday, June 06, 2016

RBI Governor drops a bomb

While addressing the press immediately after announcing the updated monetary policy, Raghuram Rajan made a revelation that should have shocked the audience, but did not. He said that RBI had entered into forward hedge in connection with the FCNR deposits collected by the commercial banks under the liberal scheme formulated by him as soon as he took charge as Governor. It now emerges that some of the counterparties in these hedging contracts have expressed their apprehension about their ability to deliver dollars.

These counterparties account for about $20 billion. If these apprehensions materialise, RBI would be susceptible to unprecedented credit risk. Rajan has warned that RBI would not lend a helping hand to such counterparties. The resultant monetary loss, if any, may be marginal; but, the damage to sentiments would be substantial. Let us wait and watch. There could be some surprises here. Is the Governor only trying to forewarn in order to contain any damage that may occur? Is this a strategy to preempt allegations of inadequate due-diligence?

Added on June 8: Are the views expressed in this post an exaggerated interpretation of what was perhaps an innocuous reference made by the Governor? It would appear so especially since Subramanian Swamy has not reacted so far! As Alan Greenspan would say, "If you think you have understood what the central bank chief says, you have probably not heard correctly."

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