Ignorance maybe bliss, but could cost a lot.

In 2013, "The government and the Reserve Bank of India (RBI) were in panic mode," wrote A Ranade. Economic growth had been 5% in the previous year, inflation was running at 14%, the current account deficit was above 3% of GDP, the stock market index, the Sensex had dropped steeply and the price of oil was around $100 per barrel. When the Chair of the US Federal Reserve Ben Bernanke announced that the Fed would start reducing its bond purchases, known as quantitative easing, there was global panic, with selling of emerging markets and strengthening of the dollar, known as 'taper tantrum'. The rupee fell from Rs 55.48 to the dollar in May 2013 to 60.73 in June and to 68.83 in August. Along with Brazil, Indonesia, South Africa and Turkey, India was classed as the "Fragile Five". Time to panic. An unorthodox weapon was proposed. "RBI offered foreign depositors protection from rupee depreciation if they were willing to bring dollars for a tenure of three years. The protection was actually subsidized insurance and covered half the cost." The then Governor of the RBI Raguram Rajan thought it was a crazy idea but "went along reluctantly". "It worked like magic." India received "around $40 billion in Foreign Currency Non Resident Deposits (FCNR), the exchange rate stabilized, stock markets recovered, and the current account deficit reduced". Subsequently, oil prices fell, the rupee became stronger and three years later when the bonds were redeemed the "RBI actually made a profit". The RBI has resorted to dollar swaps again even though there is no panic and the rupee is stable. The RBI has auctioned $5 billion on two occasions, apparently to inject liquidity into the economy. In three years when the bank refunds the dollars it has bought the rupee may be weaker, in which case, "the central bank has not only taken on exchange rate risk, but also credit risk on the counter party". The RBI will carry out further currency swaps, officials said. Large companies rushed to take advantage, with India's richest company Reliance Industries and one of its units cornering 60% of the swap on 23 April. The cost of borrowing dollars is lower, so, "That makes it cheaper for domestic firms to borrow overseas, and then swap into rupees with the RBI, according to analysis." Engaging in dollar swaps, "the RBI is operating like a hedge fund, taking on considerable interest rate and exchange rate risk", wrote Dahejia and Subramanya. Why? The present Governor of the RBI is a graduate in history with no knowledge of economics. Does he think that history will repeat itself and the RBI will make another profit? The fate of India hangs on such ignorance.