Governor Urjit Patel Off To A Disappointing Start - The 5 Minute WrapUp by Equitymaster
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Governor Urjit Patel Off To A Disappointing Start

Nov 28, 2016

In this issue:
» Has the Rupee truly depreciated?
» Is demonetisation hurting India's long term story?
» Market updates
» and more...
Tanushree Banerjee, Co-Head of Research

Demonetsiation was certainly a well-intended move. Banks, however, have turned out to be an unintended casualty. And there has been very little from the safe keeper of the trust and credibility of banks to lean on.

Past RBI governors - starting with Dr Bimal Jalan (Asian financial crisis) to Dr Subbarao (sub-prime crisis) to Dr Rajan (bank NPA crisis) - have been open and articulate with their opinions. We knew what they thought could work and not work. Investors and deposit holders had a sense of their options they considered and what they intended to do to sustain the stability and credibility of banks in particular and the monetary system in general. In short, there was trust. And the RBI governors earned it through their open and clear communication.

Although banks have been at the core of the demonetsiation drive, Dr Urjit Patel chose not to comment for nearly twenty days. At such times, we would typically expect the central banker to outline a plan. However, what we got from Dr Patel was rather more like political rhetoric.

The move to raise CRR to 100% did not just seem knee jerk. But the rationale behind it seemed like an afterthought. The higher CRR is applicable on incremental deposits raised between September 16 and November 11, 2016. That would mean deposits of Rs 3 trillion that accrued to banks during this period will be impounded by the RBI.

All this while banks were earning about 6.2% on the extra deposits with the RBI by way of reverse repo. Having to pay 4% on the savings accounts still earned them a decent spread. However, that will no longer be the case. The central bank calls this a 'purely temporary measure' to combat high bank liquidity. The negative impact on banks seems to be of little concern.

Over the past two weeks, banks have deployed the bulk of their manpower to deal with the shortage of currencies. They have to pay interest on the massive influx of forced deposits. And demonetisation has hurt their regular business, including lending. The only silver lining is the possibility of treasury income moving up and lending rates going down. These would have, over time, had a benign impact on bank earnings. But the RBI's arbitrary move has only added to the regulatory uncertainty for banks.

For you, the investor, this means being extra cautious about the valuations of banking stocks, even if you are buying them for the long term.

For you, the depositor, this means being skeptical about the liquidity and stability of your bank.

Even more important is the threat to the RBI's reputation. Despite a major disruption to the monetary system, the central bank offered no clarity on liquidity or how long the disruption will last. Nor do we know why it chose the CRR hike over other means to suck out liquidity.

In short, the communication from the new RBI governor has been nothing short of disappointing.

Demonetisation will continue to have its good, bad, and ugly effects. I strongly recommend you read about how the fight against black money will affect your money.

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02:20 Chart of the day

It might seem that the rupee's value has depreciated rapidly since the government's demonetisation move was announced. But there's more to it than that. As today's chart of the day shows, when looked at versus the US dollar, the rupee looks like it has fallen in November. However, a comparison with other major currencies quickly dispels this myth.

In fact, the rupee has actually appreciated versus most other currencies, including the Euro and the Japanese yen.

This makes it clear that it is more a dollar rally that we are looking at rather than a direct hit to the rupee's value. And why is the dollar rising so rapidly? Investors seem to be betting that the Donald Trump administration will increase spending and spark an increase in inflation. Many around the world expect the US Federal Reserve to raise its short-term interest rate target next month, as well as raise it's longer term rate forecast. This expected tightening of monetary policy has taken the benchmark US yield to a sixteen month high, helping spur the dollar rally.

It's not the rupee that's falling, but the US$ that's rising


For quite some time now, Indian Investors and India Inc. have been waiting for a revival with bated breath. And now, the sudden demonetisation move will make their wait even longer, or so it would seem. A Livemint report points out that earnings estimates for FY17 for BSE Sensex companies have fallen 2.9% since demonetisation was announced. It looks like most analysts are now less hopeful of an earnings recovery during this fiscal year, and perhaps even the next.

Before the move was announced, there were strong hopes of a consumption jump on the back of a good monsoon this time as well as the implementation of the Seventh Pay Commission's recommendations leading to more money in the hands of government employees. These factors had buoyed hopes of a quicker revival.

Instead, demonetisation has led to consumers scrambling for cash, impacting demand and business activity across industry. Thus the fall in earnings expectations is no big surprise. However, one should remember as investors is that there is nothing in these developments that changes India's longer term story, and thus also the long term value of the typical Indian company. It is times such as these that investors must remember to rise above the short term cacophony and listen instead to the long term song.


The Indian stock markets were trading mixed today on the back of alternating buying and selling activity across index heavyweights. At the time of writing, the BSE-Sensex was trading up by around 80 points. Gains were largely being seen in telecom and auto and energy stocks.

04:40 Investing mantra

The liabilities are always 100% good. It's the assets you have to worry about. - Charlie Munger

This edition of The 5 Minute WrapUp is authored by Tanushree Banerjee (Research Analyst).

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6 Responses to "Governor Urjit Patel Off To A Disappointing Start"


Dec 2, 2016

One thing which have come from the recent development is RBI has lost its position of being Independent Institution and Mr.Urjit Patel has become a tool in the hands of Govt.which they wanted and for that reason the Govt was uneasy with Mr.Rajan. The action of demonetization be good but practical difficulties are ignored.I can give example of just 2 hours before " I went for renewal of my toll Card NH-22 on Pinjore_Panchkula NH-22 "Himalayan Express Ltd."in Haryana Distt Panchkula and as per notification Rs500/- notes were to be accepted and payment can be made through swipe machine. I tendered my credit card which was not accepted. This is one reality.Similarly banks are not paying desired amount of Rs24000/-/Rs50000/ Rs2.5 Lacs respectively as per notifications. Officer and Award Staff association of Banks at apex level wrote to RBI and today to Finance Minister. It is total failure of RBI and bankruptcy shown in cash.Moreover they are telling lie daily that adequate Cash is available. In actual all soiled NOTES OF RS100/- which were not to be issued to public are being issued to public. ROUGHEST IMPLEMENTATION.ONE excuse is we do not want to disclose as caliberation could not be done earlier. However RBI,Govt. should have flooded Rs500/- notes before demonetisation in Banks and circular should have been issued " On public complaints are banks are advised to place 100% new currency in ATM and any complaint of old notes of ATM will be dealt severly." This would have not created any panic .Moreover size of Rs2000/- note should have been equivalent to Rs1000/- making easy for recaliberation. Timing was also bad. It should have been between 15-20 and second or fourth friday of any month so that second or fourth saturday banks would have been ready for this. Major loss is Mr.Patel has become puppet in the hands of Govt. and puppets are always handled by masters. Next try is judiciary and after retirement of Chief Justice we have to see what happens.



Nov 29, 2016

TANUSHREE's views are well appreciated. I read it as her views rather than analysis. Views can differ and not all views necessarily need to achieve the character of analysis. So far I know, no interest is paid on CRR by RBI to Banks. While the Banks are forced to keep 100% CRR on the incremental deposits, hope at least the Banks are considered to be compensated by RBI for the interest they pay to the depositors. On the work front again Banks are already slogging and over working in managing the unprecedented crowd of customers due to demonetization, without any reinforcement, naturally at the cost of other equally pressing assignments and their health. God bless all.

Like (2)

Gautam M

Nov 29, 2016

Let us also keep in mind that is kind of once in a lifetime event with huge stabilization concerns. It is a stress test of the banking and economic channels of mammoth proportions even by world standards. There is probably no tried and tested formulae written in handbooks which RBI governor can refer to for recourse and help unlike his listed predecessors challenges. Also he could have sat daily in front of news channels and given press statements to improve the PR and let situations on the ground go to dog or actually toil day and night to check the status of fresh developments and how best to react to it to ensure it is contained and controlled. In my opinion in such difficult times it is perfectly ok to ignore PR element for sometime and focus full time and energy on stabilizing the situation on ground. There will be steps that needs to be taken temporarily for transition duration to manage the situation and such steps might be unpopular from investor perspective but nevertheless it still needs to be taken. Later on the negative fall out of such steps can be corrected and banks which are impacted can be taken care of by RBI or govt.
Decisions that might look very pre-posterous might turn out to be wise during post mortem analysis that will be done after say 3 or 6 months. Let time tell whether Urjit Patel got off to a good start or not and my take would be to atleast have patience for 6 months to judge anyone's performance. He probably would not have slept more than 3 hours a day since last 2 weeks considering the situation on ground. One good thing out of this is the experience he is gathering in all this is incomparable and very soon I think he will be a very hot asset much hotter than even James Bond Rajan.

Like (2)

hari prasad lara

Nov 29, 2016

demonetisation is good or bad will prove after 6 to 12 months , but it is crystal clear that this is not well prepared step.every business sector is stand still. daily new announcements. see example govt announced withdrawal of 24000.00 in a week from savings account but some one go to bank bank manager say take 4000.00 and thousand of banks tag outside gate no cash. this is the reality which no one can deny

Like (1)

Ajit Kumar L

Nov 29, 2016

I too am in agreement with what PKS mentioned. The demonetisation decision by the Government was one off event, albeit a tough one on all, whether it is the common man, the Banks, or the economy at large. But, with a clear aim of a long term advantage. And in the process, there are too many parameters are playing out, which may require action. As I see it the additional CRR is one such thing. From a macroeconomic perspective, it was something that was required to suck out too much liquidity in the market. No doubt, in the process profitability of the Banks can take a small hit, but then it is part of a much larger process, in which Banks will also gain eventually.

Like (1)


Nov 29, 2016

As an analyst, I expect that you would list down at least one positive for every two negatives in anything. That is the essence of analysis. However, for the past couple of days, what we see is only negative opinions. To me as a reader, a one-sided 'analysis' is personal and biased view, NOT an analysis. What you and I can readily see, the RBI must have seen as well. Just because an announcement does not include a rationale, it does not mean that the decision is wrong, and, the collective wisdom of all behind it and that of the persons who selected this team is questionable. We expected that you would explore to dig out reasons and one potential benefit of this decision taken by RBI, however, you have taken the easy way of criticism.

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