As Urjit Patel Fumbles, RBI's Autonomy in a Bigger Jumble

Jan 19, 2017

In this issue:
» Smart cities mission off to a dreadful start
» The math of currency printing
» An update on the stock market
» ...and more!
Rahul Shah, Co-Head of Research

The government's shadow over the Reserve Bank of India just got bigger.

Appearing before the parliamentary standing committee yesterday, RBI governor Urjit Patel shied away from (or perhaps deliberately avoided?) answering most questions put forth to him.

The most gaping hole in his responses?

He did not know how much of the Rs 15.4 trillion of demonetised money has been returned to the banks. The banks are still counting, he says. Then, when asked when this number would be available to the public, he gave no definite answer.

Now, it is no secret that demonetisation has been hugely disruptive for all of India. And that's what makes this figure so critical. In all the debate over demonetisation, this one number alone would indicate whether the entire exercise was a success...or a failure.

It will show whether black money hoarders did indeed figure out how to get their stash back in the system with little or no costs. If the portion of 'black money' that was actually destroyed turns out to be negligible, it raises serious questions about the validity of the whole exercise to begin with.

But Urjit Patel dithered. He provided no answer. Perhaps his answers would have been inconvenient for the government...

Remember that, last month, after the RBI disclosed Rs 12.4 trillion of old currency had been returned by 10 December, the finance ministry disputed the figure, citing possible errors in accounting and calling for the data to be sanitised. The RBI hasn't released any fresh data since.

Many questions were already being been raised about the autonomy of the RBI. Yesterday's events will only make the questions louder. Indeed, the governor's tip-toeing around the questions increases fears of the government's overbearingness on the central bank's affairs - more so since demonetisation.

The healthy functioning of any economic system depends on its vital institutions doing their jobs well. The independence and autonomy of the RBI and its policies is a critical cog in the wheel of India's economic well-being. Any encroachment by the powers that be could compromise the whole system.

My colleague Vivek Kaul has written a book called India's Big Government: The Intrusive State and How It Is Hurting Us. It's a critical evaluation of the governance of successive governments since independence.

I strongly recommend you sign up for Vivek Kaul's Diary, a free newsletter that is usually published thrice a week. I know for a fact that Vivek's readers will get preference on personally signed hardbound copies of this timely book. It's a must-read for anyone who has an interest in India's, and therefore their own, future.


Remember the Government's ambitious smart cities project? We don't blame you if you don't. Everything seems to have drowned out in the noise around demonetisation and now GST. Fortunately, a leading daily has an update on the Government's smart cities mission. And it is not looking good. A year after the first 20 cities were selected, the implementation has been moving at a snail's pace. Only 11 of the total 167 projects envisaged have taken off so far. What is causing the delay? It seems to be the private sector. Apparently, the big ticket urban infra projects are all banking on private sector and the sector is yet to warm up to the idea. Whether they will eventually warm up is anybody's guess. What's also muddying the waters is the fact that the urban local bodies are not being viewed in the best of lights.

Based on the facts that are coming to light, it is becoming increasingly evident that the mission more a marketing charade than a real development blue print. The ambitions are no doubt lofty but there's very little action happening on the ground. The Government needs to be shaken out of its slumber. If we are to provide respectable lifestyles to hundreds of millions of citizens living in India's cities, we have to start right away.

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03:30 Chart of the Day

In case you are still facing issues withdrawing cash from banks and ATMs, today's chart of the day tells you why this is the case. As the chart highlights, by the end of December 2016, only 44% of the extinguished currency had been replaced by the new currency.

In other words, more than half of the currency was yet to be replaced. And if the data put out by SBI is any indication, this issue could well persist until the end of February by which time, close to 90% of the currency would have been replaced. But is this arithmetic correct? Vivek Kaul doesn't think so. As per his calculations, it could take at least till the end of April for the situation to get back to normal.

Well, to be honest, Feb or April, the damage has already been done. The move has affected economic growth and this should start reflecting in the results for December and to some extent in the March quarter as well. However, barring any more negative surprises, the long term story remains intact and therefore, any unwarranted correction in good quality stock should be seen as an opportunity to enter at attractive prices.

What the arithmetic of currency printing says


Indian stock markets are trading strong today with the BSE Sensex higher by 80 points at the time of writing. BSE Mid and Small Cap indices were also going strong. Amongst sectoral indices, telecom and oil & gas stocks were attracting the maximum buying interest.

04:56 Investment mantra of the day

"Investing is the intersection of economics and psychology." - Seth Klarman

This edition of The 5 Minute WrapUp is authored by Rahul Shah (Research Analyst).

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9 Responses to "As Urjit Patel Fumbles, RBI's Autonomy in a Bigger Jumble"


Jan 24, 2017

Govt. is talking of Digitisation. Isn't the RBI & all banks thereunder digitised todate to know the amount of currency printed, in circulation & retieved back post 08/11? ?Has the computer being bugged to count is twice?

This only shows there are no systems in place & we are making a big bang about nothing. Similarly things go for Make in India, Smart Cities, Swacth Abhiyan, etc.

Looks like he(Mr. U Patel) doesn't want to disrupt his image like R Rajan, by speaking up & against.


avinash b ketkar

Jan 23, 2017

nobody exactly know exact amount of black money everyboby is gussing only. Pakistani gameplan of flooding our market with dulpicate currency can not be publically propoganded because of panic and anarchy but stone throwing is stoped in kashmir is not small achievement. Unlimited cash transactions is not birthright of anybody. all transactions must be routed through bank accounts and blue heaven for hoarders and black operators must be over allest after 70 years.


Kannan Ramaseshan

Jan 22, 2017

It's too early to call RBI Governor in front of parliamentary standing committee. Still the new notes are not fully circulated and most of the ATM is empty. There is huge delay in delivery but I think the purpose is fulfilled. We have to wait at-least for 6 months to understand the full impact.



Jan 21, 2017

It is PRETTY STUPID to assume that we need ALL the 15.4 lacs back in circulation, and you are basing ALL your calculation on the same.

India GDP is approx 150 lac cr (2.3 trillion : 2016). Assuming 25% of it is CASH = 30 lac cr, considering velocity of money (historical average = 5-6, at lower end) = 6 lac cr...
Assume that people will horde some cash : about 8-9 lac cr should be sufficient.

Alternatively cash/gdp ratio 6% = 9 lac cr.

PLEASE JUSTIFY : Why do you need 14.5 lac cr back in circulation.



Jan 20, 2017

the Governor, i learnt, had said something about "double counting" being the problem. well, i would like to know how many learned ppl would take that alibi seriously. not withstanding the great 'secrecy' that most of the population has been convinced, mr modi to have so successfully maintained around currency bannnig; it seems impossible that the RBI top brass had zero knowledge about it. even if u dont challange the zero knowledge theory how come RBI got entangled in worries about "double counting" something which is absolutely tangible and not entries in account books. what's really really puzzling a simple mind like mine is the not just the sudden arousal of great qualities in Mr Singh by virtue of which he "protects" a fellow (?) economist from his own party members but also, the precise identification of same by the media.
the question my feeble brain encounters here is how and more importantly why (you can put that 'why' three times in bold capital) Mr singh could constraint himself so much as to muster up the will and strength to defy his own party members.
i mean i am really puzzled coz when u ask a serious question about results of a supposedly earth and heaven shaking excercise u get such a damp squid in which the media is made to paint a picture where it implicates someone like Mr Singh a great white knight and RBI has to play the part of the delicate damsel in danger against powerful enemy like the congress party. its so difficult to digest so many role reversals at one go.



Krishnan Venkatasubbu

Jan 19, 2017

The way Urjit Patel was responding to the questions clearly shows that the demonetisation exercise is utter failure. INDIA's respect in the international community in a few areas are due to the professional conduct of affairs by institutions like RBI and its world class Governors like YV Reddy, Subba Rao, Raghuram Rajan. It's shame on BJP Govt that they appointed a person like Urjit as a successor to these eminent personalities. And Modi's Govt is only making big noises and announcements of scheme after schemes without any results/ effects on the ground.

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Damodar Vinayak Bale

Jan 19, 2017

The "Mythology" of this part of the world called "BHARAT" since ancient times and now called "INDIA i.e. BHARAT" is unique in itself. Many call it as "HINDU" mythology without telling about what is the meaning of the word 'HINDU' and from where this word appeared. Though it's "SANATAN" i.e. "ANCIENT".
The word "HINDU" is no where mentioned in "VEDAS" or the "Epics like 'RAMAYANA & MAHABHARATA'. Even later 'literature' like "SHAKUNTALAM & MEGHADUTAM" by Peot 'KALIDASA', carry no mention of the word "HINDU". "Selfish Interests" of some 'Intellectuals' misused their intelligence making the innocents suffer along with the culprits.

Like (1)

Damodar Vinayak Bale

Jan 19, 2017

Extremely 'well-done'. Under prevailing conditions, he has done extremely good. The conditions of today's "ECONOMY", compared with "EMOTIONS" stand far behind. "NATURE" made 'emotions' cannot and will never overtake "HUMAN" made 'economy'. Nature created humans and human created economy.
"ECONOMY" is a 'fancy' and "EMOTION" is a 'fact'. "LAWS" will never come to end. They will go on increasing endlessly. "Human" intelligence is on test and "USE & MISUSE" will be judged by "NATURE". Because ultimately 'nature' will react when 'misuse' takes over 'use'. Innocents will suffer along with culprits without having committed any flaws.

Like (1)


Jan 19, 2017

Wow Rahul, the way you have written about the behaviour of the RBI Governor it seems you were there at the parliamentary Standing Committee. Were you there?
The point I am trying to highlight is that your constant badgering of everything the government does, is only going to spoil the faith people like me have in your newsletter. Just the way it seems to have happened in the case of Mr. Modi's bashing by the English press in India in the 2014 elections and the Mr. Trump bashing in the 2016 USA elections. We all can see the bias against the present government in the Indian English press and if you are going to be just another "bhopu" then you have your reputation to loose.
This demonitisation was expected to effect the growth rates in the short term, you like all the others seem to highlight that the slowdown is because of this! Not very objective writing or analysis in my small opinion. I used to recommend this newsletter to people but now I am having second thoughts. You could dismiss this as another Modi Bhakt rant and remember that there are quite a few of us who read a few things and do a little bit of analysis, we might not be very good at it but we can definitely see the bias.
Food for thought for you is that in case most of the demonitised notes are back does, does it not give an idea about the amount of fake currency floating around, so many presses have been at it for so long. So my guess is the fake currency amount is actually a lot greater than estimated by all the experts.
warm regards

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