A potpourri of personal thoughts and anecdotes on exchange control, the dollar, the rupee and SDR
During the over three decades in central banking, I never worked in foreign exchange or related functions. Without going into detail, this was part choice and part chance. Nevertheless, my batch’s 64-week induction training involved working for two months at all desks, including clerical ones, of the Exchange Control Department (ECD), as the department was then known. When ‘management’ replaced ‘regulation’ in the erstwhile Foreign Exchange Regulation Act, ECD eschewed ‘control’ and became the Foreign Exchange Department. Similarly, the Controller in charge of the Department’s Central Office in Mumbai became a Chief General Manager like any other.
The ECD was one of the few public-facing departments of the Bank. Travellers, including business people, bureaucrats, and students wanting to go abroad for work or higher studies, came to ECD for their foreign exchange. So did foreign investors, exporters and importers, seeking approvals, exemptions, and condonation.
Changes in foreign exchange regulations were frequent in the late 80s and early 90s. In those pre-internet days, instructions often took time to trickle down to the hoi polloi. A few unscrupulous elements, thankfully small in number, sought to enhance their importance by keeping such instructions to themselves. As a result, I soon gave up efforts to stay abreast of them. Whenever friends sought clarifications on a forex-related matter, I pleaded ignorance and asked them to approach their banker or ECD directly. I refrained, one could say deliberately, from affecting any semblance of punditry in these matters. The internet would eventually change all that. But, many found working in ECD an attractive proposition.
Centre of excellence
The ECD I knew was a centre of excellence, just as the related market departments and other public-facing departments were. The Bank tried to post only knowledgeable persons and those with an aptitude for dealing courteously with the public. At least two from those days rose to become the Bank’s Deputy Governor, and some others became Executive Directors in later years. Several others left the Bank to make a mark in foreign banks, media, and higher education.
Ms IT Vaz was one of the first two lady Executive Directors of the Bank, but you will not find a mention of her in the Bank’s history. She worked in ECD for many years. When she retired in 1996, she was my boss. However, my interaction with her did not go beyond visiting her office a few times. Vaz was a strong and bold lady who spoke her mind, whether to bosses or government officials, probably explaining why she never became a Deputy Governor. She also had a fine sense of humour. Once while accompanying Yashwant Thorat, my immediate boss, to her office, she admonished him for his frequent travels: “Mr Thorat, you are more in the air than in the chair!” At her well-attended farewell on retirement, she recalled how exporters pleaded not to be sent back to some government department for approvals or certification. But, on the other hand, they were happy to return to the Bank for further clarification.
A few anecdotes
Given the nature of work in the department, the scope for mischief was immense. But, to the Bank’s credit and of its staff, reports of illegality were rare, readily reported if discovered, and promptly acted upon. Perhaps the immense peer pressure from fellow workers and the internal audit commenting on early signs of deviant behaviour took care of this. There were, nonetheless, a few exceptions. There was the odd person who showed an interest in a ball pen or the one who indented for two calendars and two diaries from each bank he interacted with in early November. The latter would eventually become known for manufacturing excuses to travel anywhere. But these were tiny pinpricks as compared to the situation elsewhere. So I cannot help but conclude with a few short anecdotes on those who took their work too seriously and those who made light of it.
Enemy of the country!
When I was in Mumbai in the mid-1990s, one couple I often met were the Parameshwars before they moved to Chennai and, later, Bengaluru. Mr Tharoor Parameshwar, Param to friends, edited the Indian edition of The Reader’s Digest for a quarter century (see here). Today, he is better known as the uncle of Shashi Tharoor, the Member of Parliament from Thiruvananthapuram. Lily Parameshwar, I believe, worked for a travel company at some point.
One day she asked me about a particular official from my Bank. I had only heard of him. I informed her that he went abroad for higher studies and settled there to work for a well-known finance company. How dare he, she thundered in her high-pitched voice, bringing her hand down swiftly and leaning forward. Her hunchback, more pronounced with her advancing years, made the action more menacing. The sheer anger in her voice took me aback. But, before I collected myself, she clarified. While working in ECD, this man treated anyone who wanted to go abroad as an enemy of the country! Poor thing, once, despite her physical difficulties, she drove me, my wife and my mother to our next halt, too far to walk and too close in Malabar Hill to take a cab.
Scrutiny of statements
Another rare exception, let us call him Mr X, was infamous for various reasons, not the least because the stock market was his priority. Central banking came only a few notches below, if at all. Immensely wealthy by consensus, he always wore the same dress, a baggy set of dark pink shirts and trousers in a shade of blue. Neighbours said the lights never came on in the evenings at his home.
X’s job then was to scrutinise XOS statements received from banks. These were for exports where inward remittances were outstanding beyond 180 days. Scrutinising these and taking them up with recalcitrant banks and exporters was a dreary job—an informal quota of about 100 per day was the norm. In the forenoon, one could find these statements in his in-tray. Sometime in the afternoon, as if by magic, they disappeared from the in-tray and reappeared in the out-tray. One day somebody caught him lifting the pile and transferring them from the in- to the out-tray. A complaint went to the Joint Controller, who laughed it off in his typical practical approach, saying maybe that is what these statements deserve. Not long later, the Bank would computerise the submission and scrutiny of these statements.
A Black Monday presumably put paid to his Buffetian ambitions, and he left behind his immense wealth to his young wife, who he married late, and never allowed a home visit even for her father’s cremation.
A different fragrance
A lady batchmate in one office (quite a few of them there) reported this story during their training in ECD. Somewhat senior to us and working in the same department was one person, Mr Y, with a happy-go-lucky attitude. They found this okay as long as he didn’t trouble anyone. But, having studied in the city, he had other local priorities. Y was, therefore, rarely seen in his seat. Whenever he appeared and passed by, he left behind a waft of rare and expensive perfumes, and the ladies exchanged meaningful glances. But, of course, the Bank can also be kind and tolerant, almost to a fault. He would later become a Regional Director of the same Office.
The last story goes back to the 60s or 70s. Even in the 80s and 90s, ECD officials often insisted on applicants’ presence. I believe this was to prevent agents, including professionals, from giving the Bank a bad name by taking money in the name of Bank officials when transactions were always clean. During my inspections, I heard a story of one such agent taking 500 rupees, purportedly to pay a Bank official, to allot an export code number, usually allotted immediately against an application, no questions asked.
In one case, the representative pleaded that the applicant was a VIP and enquired whether ECD would waive his presence. The junior official did not budge. A few days later, the applicant appeared unannounced and all by himself, represented his case, asked for the papers to be signed, did the needful, and left as quietly as he came. JRD Tata was then a member of the Bank’s Central Board of Directors.
Issue and DBOD
After my 64-week training, Administration gave me a choice between the Rural Planning and Credit Department and the Issue Department which carried out the Bank’s currency operations. For reasons I will explain on another occasion, I chose the latter. After working in currency management for over two years, the office posted me to the Department of Banking Operations and Development (DBOD). As the AGM in Administration explained, they had no choice because 18 officers in my grade were retiring from DBOD that year. As banking was one of my options in my undergraduate economics course, I was pleased to go there.
A strange offer
One day in 1992, maybe 1993, I received a strange offer. Mr DS Ramachandra Raju, then Manager of the Chennai Office, summoned me. A pleasant and amiable officer, Mr Raju was very courteous even to officers far junior. He said that the Central Office was looking for bold and dynamic young officers to take on the challenge of foreign banks and the new generation of banks that were coming up. He did not seem to know about the details but asked whether I would go.
I later learned that this strange offer was related to posting as a dealer in the Bank’s forex dealing room. It was strange as I had never worked in foreign exchange earlier. Moreover, I would describe myself any day as more laidback than ‘dynamic.’
I was then somewhat newly married if one were to ignore the eight to ten months that the Administration spent deliberating whether to post me to New Delhi, my wife to Chennai, or both of us to a third centre. Eventually, they transferred her to Madras against stringent conditions. Moreover, we had recently moved into the first floor of a 19th-century colonial-era ‘garden bungalow’ in Kilpauk, already a rarity in the city. Leaving that for Bombay, where accommodation was uncertain for at least two years, was not a prospect we were looking forward to. Moreover, I thought I was doing reasonably well as a junior inspecting officer in DBOD. Therefore, I politely turned down the offer.
Nevertheless, why the choice of working in the dealing room fell on me remained a mystery for a long time. Recently while outlining a blog post on Late R Janakiraman, it dawned on me that he was then the Deputy Governor in charge of the department. Janakiraman was not just my first Manager at Chennai. He was also a member of my interview board.
At my interview, after the Chairman and a member of the RBI Services Board had asked their questions, Janakiraman posed the last questions. As I would later learn, Janakiraman was the last word in the Bank regarding foreign exchange and exchange rate management. He queried me about India’s sterling balances at the time of independence and how it got depleted after that. He also wanted to know about related developments, which I answered satisfactorily.
Janakiraman’s last question was on SDR or Special Drawing Rights. He asked me what it was and how one calculated its value. After briefly explaining SDR and its history, I said its value was linked to a basket of five currencies. The IMF fixed the weights of each currency in a quinquennial arrangement. The five currencies then were the US Dollar, the British Pound, the German Mark, the French Franc, and the Japanese Yen. When I started specifying the respective weights of each currency in the basket, Janakiraman stopped me midway with a smile and said it was okay. That was the last question. I walked out with a spring in my step as I thought my interview ended on a high note.
R Janakiraman is now best known for the six volumes of Janakiraman Committee reports on the ‘irregularities in government securities transactions’, better known to the public as the securities scam of 1992. Even the official JPC report on the scam would base its facts on the Janakiraman Committee reports. After my interview, selection, and initial training, the Bank posted me to its Chennai Office, where Janakiraman was the Manager and remembered me from the interview. He took our training seriously as a former Bank’s Zonal Training Centre instructor. As I will explain in another post, some issues regarding my training brought us closer, and our one-on-one interviews lasted about one hour. But, as I will elaborate in a separate post, it was an unhappy and bitter Janakiraman that I last met at his residence in the late 1990s, not long before he passed away.
The present context
Breaking from my self-imposed distance from matters relating to foreign exchange is due to a few YouTube videos. One gentleman, an expert on financial issues and with a subscription of 1.7 million, was holding forth on how soon the Chinese yuan would replace the dollar. I commented on how he could base his views on five-year-old data when the circumstances change every few months if not weeks or days. The expert replied condescendingly that I might email him to clarify my doubts.
On another channel, usually focussing on Indian politics and myriad other subjects of topical interest, the interviewer asked how soon the rupee would be on par with the dollar. The expert replied that he expected the ratio to become 1:3 in about three to five years. To put matters in perspective, that was roughly the rate as long back as 1947, and at the time of my writing, it was about 82 dollars. And then there were the numerous chest-thumping nationalist videos speculating how soon the Indian rupee would replace the dollar. Those with even a basic understanding of the subject would appreciate that these are silly and fantastic claims.
Rupee and the dollar
I believe speculations on the rupee replacing the dollar, or any other currency replacing the dollar, are a bit farfetched. But, what is possible for the rupee, in the short term, is to become a reserve currency. That depends on the global perception of the Indian rupee as a stable store of value, one of the three functions of any currency. In turn, this depends on the economy’s size and strength, quality of governance and the rule of law. I will discuss this in another post.
Rupee and SDR
In January 1999, the European Union introduced the Euro for accounting and digital payments. They followed in January 2002 with the Euro in coin and currency forms. I worked in Europe during the period and was happy to receive some of these early, freshly minted specimens. With this change, the German Mark and the French Mark exited the SDR to make way for the Euro. Later, the Chinese Yuan joined the basket in 2016. For a detailed factsheet on the SDR, see here.
What is now possible is for the Indian Rupee to become one of the SDR basket currencies. Traditionally, since 1969 when the IMF created the SDR as an international reserve asset, more for accounting purposes, the currencies in the basket were of the five biggest economies. With the Indian GDP having overtaken the GDP of the UK, the Indian Rupee could replace the British Pound. Or will it become the sixth currency in the basket? IMF may not like leaving out the British Pound as London is still the most prominent international financial centre. Whether as a fifth or sixth currency, it will undoubtedly enhance the acceptability of the rupee as a reserve currency. To me, concerns expressed recently about Indian democracy has to do with vested interests not wanting the Indian rupee to play any global role.
Future of the dollar
The US government has been shooting at their feet for a long time, giving the rest of the world ample reasons to drop the US dollar from their choice currencies. If that has not happened, it is more for want of alternatives. The US has been weaponising the dollar through sanctions almost at the drop of a hat (see Satyajit Das here). Apart from the reasons Das cites, the FATCA or Foreign Account Tax Compliance Act, is the most draconian. This US law mandates even foreign financial institutions to report through their government details of transactions if denominated in the US dollar. When dealing with this subject about ten years back at the Bank’s DBOD Central Office, I remember telling myself that this would affect the long-term interests of the US dollar. A more elaborate post on my prognostications for what lies ahead for the US dollar will follow in another post.
© G Sreekumar