A great central banker and a gentleman

What do you write about a man

Who never used even a post-it from his office for his personal use?

Who even as deputy governor of the RBI preferred to visit his Indian Bank branch personally and stand in the queue?

Who never wavered on his commitment to inflation control as the dharma of a central bank and the best anti-poverty programme?

Who was hurt visibly when he felt there was a systemic effort in the Financial Sector Legislative Reforms Commission to strip the RBI of some of its powers that he felt may threaten financial stability?

Who recognised the weaknesses in the RBI and the banking system, which affected the common person with whom he had a deep empathy?

Who wrote more than 500 articles over the last 20 years to remind policymakers and practitioners of their responsibilities?

Who recognised the links between globalisation and financial crises way back in 1996 — far before the global financial crisis?

Who had such a razor sharp memory that not only could he recollect personal anecdotes and traits that make history come alive but also lend understanding to what shaped certain events and decisions?

Many people considered him to be a very conservative and conventional person. This was not true. There are two instances I recall that showed he was far ahead of his times and was open to experimenting with new ideas. He strongly believed in gold as an important asset class in reserves which helped diversify risk.

He was keen that a small amount of gold be used as a trading portfolio. However, his suggestion was never agreed to.

The other instance was when bond markets collapsed in December 1993 and RBI disclosed an unrealised loss on the bonds portfolio of ₹809 crore. He actually gave us permission to use options for hedging purposes, an unheard of thing then.

He felt stifled in a repressed financial system when rampant fiscal deficits and its automatic monetisation were the norm, when CRR (cash reserve ratio) and incremental CRR were the principal tools of monetary policy, and when the FCNR Scheme with its exchange guarantee was used to shore up the forex reserves. He considered these three as the cardinal sins of a central bank.

In June 1994, RBI had to provide for on accrual basis exchange loss on $10 billion dollar of outstanding FCNR liability, of which interest liability alone was $5 billion!

This would have resulted in RBI going into the red in its balance sheet that year. R Janakiraman and he found an ingenious solution. The liability was moved to the government account because it prepared its accounts on cash basis and the RBI undertook to transfer additional profits to the government each year towards the exchange loss in that year.

My job was to work out the likely losses that would have to be provided for in the budget for that year — an exercise that had to be done in January each year. This proved to be a most difficult task, as on the one hand we had to try and arrive at a properly reconciled figure of the liability (principal and interest), the projection of redemption in that year, and the likely exchange rate at time of the redemption. I remember how Tarapore went into enormous detail to ensure that the whole process went off smoothly. It was entirely in character, the perfectionist in him. Everything had to be just so.

The period between October 1995 and February 1996 was a very trying one. The rupee started coming under attack in August 1995 when the dollar started strengthening against all other currencies. RBI intervened in the spot and forward markets and used some monetary measures till the markets stabilised in February 1996.

Tarapore felt very hurt that RBI policies at that time were seen as being unfairly held responsible for the slowing down of the economy in this period. He explained repeatedly in his subsequent writings that in fact over the year there was sufficient liquidity generation and the slowing down was an inevitable outcome of the excess capacity created in previous years and growing competitiveness on account of opening up of the economy.

He never really felt vindicated on this account. I met him for the last time on January 29. I will miss him, his wisdom and counsel intensely.

The writer was Deputy Governor, Reserve Bank of India

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