RBI offered foreign depositors protection from rupee depreciation if they were willing to bring in dollars for a tenure of three years. Rajan later revealed that he thought it was a crazy idea to offer an exchange rate cover to investors, but went along reluctantly. Of course, as RBI sets domestic interest rates, which influence the swap deal, and can partly influence the exchange rate, through intervention, this is an asymmetric bargain. The unorthodox had become mainstream for central banks on both side of the Atlantic after the Lehman Brothers crash. It is in this light that one needs to examine how unorthodox RBI can become, and how far it can deviate from the tried-and-tested wisdom of not taking commercial risks and not dipping into the fiscal kitty.

Source: Mint May 06, 2019 16:52 UTC