Much of my early career revolved around the RBI. It’s circulars. It’s reforms. Institution building. Those were heady days of the economy opening up. We were the fresh new blood who were heralding the change. We were the ones who believed in the new ways, the old licence raj came to us only as stories. Or as something we remembered our elders had suffered. For us, the bold new world, without protectionism, without protection.

The questions we faced were big, nation sized. How does one have a national stock exchange that does not allow another Harshad Mehta to rise? We knew of the elder Ambani’s stories of corruption, but they came to us through a lens of debate on the right response to a restrictive regime. We were the soldiers at the trading desk when variable rate bonds were mooted – we were unmoored, and we knew the waters could be choppy. We sailed on these, for we knew, this was the price of freedom. We were the first wave of financial engineering – legitimately – that is, as the regulators debated whether insurance was a form of gambling or not at our instigation – all we wanted was the ability to build derivatives and options. And if it was not, then could derivatives be considered a gamble. We defended the hundi system as a native financial instrument though we were far removed from the ground realities of its intricacies. We stood there, soldiers sent to war between the regulated past and the slightly less regulated future.

Each of us that year were building something as we traded. I was wide eyed, as young colleagues – my batch – but far more savvy with mathematics and coding – built giant models of our financial system. We were on a journey to discover yield curves. Nobody had needed them in a regime where interest rates were granted down the chain like commandments. Everything was done by circulars. Now, it was the same circulars that heralded change.

My favourite one was that circular in which the RBI granted Regional Rural Banks(RRB) the right to manage their own treasuries. I have bored many of you with that story, and it is still my dearest one. That circular helped me find myself – but only after, or during the year when I trained each and every one of the 130 RRB chairmen in money trading. Do you know what it is? It is when you exchange the money you have in your treasury (all the spare deposits left over after lending, all the monies gathered for big repayments, all the cash that is ready to lend, but wasn’t lent today and such like) for instruments. With a part of it, you bought some safe ‘GoiSecs’ or government of India securities. All managed by the RBI. Issued, traded and administered by them. Some money was lent overnight – at the local trading rate. You, outsiders, when you trade money, you hear of the LIBOR from London or other banking centres. We were trying to figure out what it would be for Bombay. Before Regulation, the banks were virtually instructed (oh, isn’t that how it was officially? I grow old, I forget as much as I remember). Everyday we bought and sold cash for a day or two at a time, as did the new participants in the market. Including the RRBs, who wanted to play at the big table.

We were in the dark, finding our protocols, understanding how sneaky our trading opponents could be, learning how to be friends or ‘native’ brothers to get a better deal. They played the same games to get a better trade than us. Needless to say, women there were clearly not part of the brethren. Read that as you will. Those were heady days, we battled for our profits, for our integrity, for the freedom of rates, and for fair markets. We were the market makers – as we plotted the charts that would help us understand who we were when we were money.

Oh, and the markets were slim, with hardly any depth. There would be days when the only deal done was a puny 50 crore between SBI and LIC, only to see it reversed the next day. Or other dry days when SBI borrowed Rs. 500 cr from LIC for a fortnight, and we nodded knowledgeably – ‘ah, oil payments’, it must be the end of the quarter. We, the players at the forefront of data were not part of the establishment’s deals, but we were so part of the deal flow. It was either that or death as a dealer. In those markets with such little depth, how could we construct authentic curves to price our deals? How could we even seek to design primary dealerships, let alone bid for it, when the market was so shallow (And we did, many of us young ones). What use was a market maker if all they would do thrice a week is sullenly stand in a corner and watch the ball bounce between the big 4 players, all old school?

So the RBI circular that gave RRBs their freedom was like a breath of fresh air for me. A whole new market. Smaller deals, maybe, but at least some market movement. It was a reprieve from the near drought in the money centre of the country. The habit of freedom was new, deals were not a part of who we were, not then, not yet, so deals were not as plentiful as we had hoped.

So, I courted them. And did I deal, boy, did I deal. Not just me, for the scent of money to traders is stronger than the scent of fresh blood to hounds. There were others who followed quick, but I was always part of the flow, even if I refused the deal. The others were sharper players than me, and where one would charge a paisa or two as margins amongst us cognoscenti, they even charged a rupee. A couple of times, so did I – but then I was never as venal as the rest, so doing a deal with me was always better for them. Or that’s what the numbers said. Except, no one had taught them how to do the numbers for the debt markets. They traded debt just as one would trade stocks – no wonder the margins seemed normal to them. Margins – as in profit margins.

That’s not how debt works. Debt is mathematics. Not simple, but not that complex either. They had been given the freedom, but reforms and deregulation came with not a word about bond math. How could a crusader rest? A year later, a week of grilling at a time, four batches later, my students were beating me at my own game. And the rest of the market. Such were the bitter joys of the markets.

What did not change was the risk – the open positions. Dealing with a bank physically within the clearing zone was easy. Remember, we had deregulated, not modernised. Bank computerisation was still spelled with a capital C. Clearing was manual in part, though the recognition and matching machines had created a whole new set of rules. Apparently cheques could not be folded, or have leaky edges. Nor could the honest sweat of the courier have touched the ink on the cheque. The foreign banks I dealt with were prompt, and their cheques crisp. I was fine there. A deal closed was a deal I did not worry about. It was like the movies, crisp dialogue, something about sports, a familiarity or two, a quick quote, counter-quote and a thump – done! The word done would trigger off the back office chain as it should.  The state co-operative banks were a quick half an hour local train ride away with city savvy couriers – and I looked on in envy as those traders received phone calls within the hour telling them that the deal had been completed and would be in that very day’s clearing.

My clients, the RRBs, were situated in – you guessed it – rural areas, spread all over the country. They would send their cheques with their trustiest junior bankers, carrying the precious Rs.5crore cheque (minimum deal size in those days) or multiples thereof in the front pocket of their bush shirt. The man, and it was invariably a man, would be sent off to book a ticket for that day’s train as soon as I shouted ‘deal’ down the phone. This back office process was totally different from what my friends trading in New York could expect. Nope, not like the movies anymore. The train would be boarded that night, and the cheque declared on route. As I waited, with an open position. Only a trader can know the horrors of an open position. It was as if I was holding a Rs. 5crore burning hole in the palm of my hand. The train then trundled across the country – remember, India did not have the Shatabdis and Duronto expresses in those days. Two days later, the gentleman would arrive (we would never meet, we did not need to), pay their respects at the public sector bank that used to mentor them, and then walk over to RBI’s clearing house, depositing a crushed, soggy, cloudy inked cheque into the system. It was then I would start praying loudly, and rather fast, for if the machine did not recognise the cheque, we would have no deal. I could not hold the deal open longer for more than these days – already multiples of what was held open for others. I remembered the days when I was a SWIFTmeister, transferring dollars across the globe in seconds. As I type this, I can feel the stress ball build up at the base of my throat. Those deals were worse than death, the extreme highs of taking a profit could not make up for the deep dives of a deal at risk.

From there, when we moved on to crisp processing across all centres, to trades that could be conducted across screens, to risk management systems that were based on good quality data was quite a short journey, thanks to the governance of the RBI. It wasn’t long before the fortnightly reports were no longer a pain, well, not as much as they used to be. And yield curves were populated so that financial products that we engineered did not need to include the traditional hope and a prayer on a wing – we were on surer ground. Regulations matured, less was more, and as there was more, it became worth the game. For others more than for me, I realised. The swings of the trader’s desk were not for me. I was made to be a macro economic researcher, and so I was for many years thence, first there, then, later, when I moved to London. To research, to teach and then to tell the story of how the grand monies flowed, that was heaven. And for the special few, I’d even show them how they could tell what would come next.

PostScript: As promised, I do not mention Raghuram Rajan even once in the post, well, with this exception. But now that I have,  I will add that he is one who has joined the grand tradition of building institutional solutions for managing the risks of an increasingly vulnerable monetary system. The vulnerabilities come from within, and from the world waiting to make a profit at any cost. RBI governors since the 90s have been part of this unbroken chain of reform, and each has had to pay a price. Some slowed down, some made compromises, some took more risks than the system could bear – but then it managed. We never skimmed as close to the bone as we had in 1991, times were never as tough again. But they might be now, for the rot is within and without, and it needs a steady hand at the wheel that will put sense before caution, risk before growth and systems before people.

Does this mean I have an opinion about the departure of the Governor, about the marketplace of ideas, about the quality of the discourse and about the elaborate masquerades of elitism and intellectualism that fool no one though they come at the cost of true and honest debate? Of course I do! Another time 🙂

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