Is the RBI Telling Us Something That the Govt Isn't? - Vivek Kaul's Diary
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Is the RBI Telling Us Something That the Govt Isn't?

Mar 21, 2017


One of the things that we have learnt in the business of economic forecasting is to highlight the forecasts that we get right and tom-tom about it. The new Reserve Bank of India deputy governor Viral Acharya said something two weeks back that we seemed to have missed (you know with the media expanding at the rate it has, it is difficult to keep track of everything).

Nevertheless, here we go. Acharya said on March 6, 2017, a few days after his birthday: "I think everyone should keep in mind that the remonetisation is taking place at a very fast pace. We have some way to go, but I think we expect that within two to three months we will reach full currency in circulation. It will be slightly lower, but it is in that ballpark (number)."

What Acharya was basically saying was that by May 2017, the currency in circulation will come to a level around what prevailed before demonetisation rendered Rs 500 and Rs 1,000 notes useless. This is something we have maintained from the very beginning, even though we have been ridiculed about it more than once, as we have gone along. (You can read the pieces here and here).

In fact, if the Modi government is to be believed there was never any problem because of demonetisation. In fact, the finance minister Arun Jaitley, said in early February: "At no point of time, not for a single day, was the currency inadequate." Around the same time the economic affairs secretary Shaktikanta Das, who reports to Jaitley, said something along similar lines when he said that the remonetisation process was complete. Remonetisation essentially refers to the process of printing money and pumping it into the financial system.

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We live in Mumbai and not in Delhi. And we don't know Das. But if we did, we would have definitely asked him, if the remonetisation was almost complete in February, why is the RBI deputy governor, who knows a thing or two about such things, saying that remonetisation will be completed only in May 2017.

Now let's get back to look at what Acharya is saying. Take a look at Figure 1. It shows the currency in circulation every week, through late January 2016 to March 10, 2017, the latest data point that is available.

Figure 1
Figure 1

What does Figure 1 show us? It shows us that the currency in circulation fell dramatically in the aftermath of demonetisation. This is not surprising given that more than 86 per cent of the currency in circulation was rendered useless overnight. And it has been rising since early January 2017, as the RBI prints and pumps more new currency into the financial system. The average increase in currency in circulation per week since January 6, 2017, has been Rs 38,645 crore.

At this pace of increase, over a period of 10 weeks, i.e. two and a half months (the average of two to three months that Acharya said), the total currency in circulation by May 19, 2017 (10 weeks after March 10, 2017), will stand at Rs 16.32 lakh crore (Rs 12.46 lakh crore as on March 10, 2017 + Rs 3.86 lakh crore added over the 10 week period). If we go for the full three months, then the total currency in circulation as on June 2, 2017(12 weeks after March 10, 2017) will stand at Rs 17.10 lakh crore.

The currency in circulation before demonetisation was announced stood at Rs 17.98 lakh crore (as on November 4, 2016). If we end up with a currency in circulation of Rs 17.10 lakh crore after remonetisation is complete, the total currency in circulation would have fallen by around 4.9 per cent. If we end up at Rs 16.32 lakh crore, then the currency in circulation would have fallen by around 9.2 per cent.

If the currency in circulation is expected to come down by around 5-9 per cent, then what was the point in disrupting the economy in such a big way, is a question worth asking. Of course, the way things are these days, we won't get answers. All we will be told is that in the long term, demonetisation will be beneficial.

Further, in this age of relentless media, people have forgotten by now that going digital wasn't on the original list of aims of demonetisation. It was subtly introduced only once the original aims of tackling black money and fake notes, went out of the window.

What does Acharya's comment and our analysis accompanying it, tell us? It tells us, something we have been saying recently, that Indians are going back to cash. The brief spurt in digital transactions has been reverted and this shall become more and more obvious as we go along. It also means that the RBI will have to print and remonetise a greater portion of the demonetised currency. If it does not do that then there is the risk of not enough currency going around in the economy and that will have an impact on the total number of economic transactions.

The RBI of course recognises this. It recognises the fact that an adequate amount of currency is needed in the economy. It also recognises that digital transactions despite all the hype around them haven't really taken off. In this scenario, more and more new currency will have to be introduced into the economy.

Having said that the RBI, under the new dispensation of Urjit Patel, can't say this in a very direct way. Nevertheless, sometimes we do have to read between the lines to understand the real message behind what is being said.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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14 Responses to "Is the RBI Telling Us Something That the Govt Isn't?"


Mar 22, 2017


Technology has a cost, and the cost will reduce over a period of time when more and more players participate and more users start using the technology. The issues which have been raised by you on digitisation were also raised during nineties when telecommunications sector was thrown open in the country (not sure as to whether you had also raised this issue or not). Issues regarding adaptability of the rural masses to use of mobile phones and technology , affordability were raised at that point of time also . Public memory is short but it sounds ridiculous when a seasoned writer raises such issues. Now , a decade and a half later it would be appropriate to do some introspection as to whether the rural masses are using mobile phones or not .Have the rural masses benefitted by the iadvent of technology or not or are the Rural masses able to afford it ? A gentle reminder Sir, next time when Issues on Digitisation , Notebandi, Black Money are raised please remember "Rome was not buit in a Day".

Like (1)


Mar 21, 2017

Interesting article as usual , from Mr Vivek Kaul. I think the main reason for sudden notebandi was a preemptive strike on opposition parties especially of UP to cripple them financially before elections.
There are enough photos of UP leaders getting garlanded by high value currency notes and it is an open secret that money plays an important part in elections.The reasons cited that is curbing black money , fake notes and then promoting digital economy was all eye wash.

Like (1)

D K Purwar

Mar 21, 2017

Failed to understand this stupid article. We have subscribed to equity master for share recommendation and not for irrelevant mails. If you have political ambition then please join some party or write your articles in financial dailies /magazine. You are rich enough to start you own news paper.Let the government should manage their house and you manage you house. If you feel demonetization have destroyed the whole economy & has adverse impact on particular sector & industry, please advise your analysis it's implication on stocks to have buy or sell recommendation. Please do your job honestly for which we are paying to you.
As far as Modi government is concerned, we feel they are working hard and with sincerity & honesty. Though we have all sympathy with pimpes/economic offenders. Public overwhelmingly supported & given strong mandate post demonetization to center government.

Like (1)


Mar 21, 2017

There he goes again. Mr Kaul deliberately misses the point that normalcy has returned in the country. Here, he wants to paint as though there is some problem in the country. Modi-baiting as usual. We cannot expect anything better from this guy.


Like (1)


Mar 21, 2017

I am aware of this as I am staying in Vizag where we still see no cash boards or worse still asks our PIN and the when we ask for cash it says Sorry No cash!

Like (1)

satish Dabholkar

Mar 21, 2017

In the India Today conclave our Coal minister Mr Goyal has given the answer in one sentence that those who are affected adversely by some way or the other(Step against Black money)will vote against Note Bandi.
This is applicable to Mr Kaul's article.No one is interested in these type of articles as it is waste of time and energy.Now the articles are required how the money brought in the economy to be fruitfully used for the benefit of the Nation.

Like (1)

S Raghunathan

Mar 21, 2017

There are enough topics in economy of this country to be discussed. but you are so much obsessed with demonetisation you are keeping on rpeating the same things in varoius ways. You are interested like politicians and TV channels repeatedly saying that you were right. Please move on from this topic unless otherwise you have new point other than discussed already

Like (1)


Mar 21, 2017

This article is pure arithmetic. Even though the demonetization was declared on 8th November some time was given for exchange in limited quantity. That means the notes were exchanged and used. Besides notes were allowed to deposit in bank accounts and allowed to withdraw with certain limitation. The system was reviewed periodically to facilitate supply. Cash was not only with public but also with banks and RBI currency chests. They were not only Rs.500 and Rs.1000 but other denominations also. Even new notes were printed before the declaration. Now we understand that the Government has already collected some income tax and some more is in the process. Besides some notes were seized from co-operative banks and also from other banks. The Author should throw some light about these things if has some information.

Like (1)

Kishan Sharma

Mar 21, 2017

You say you have been ridiculed. But to me it seems that here & in your previous pieces on this subject you have been ridiculing Jaitly, Modi, RBI and the entire govt., without taking a breather and trying to reflect on why this govt took such a stupendous decision. Was the intent of govt to trouble the common folk, the aam aadmi ? Was it to try to close the tap of illegal currency coming from Pakistan for terror ? Was it to make a fool of themselves in the eyes of entire world of wise people like you ? I think it is not too late for you to stop this propaganda against govt.

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Mar 21, 2017

Dear Vivek,

I have a question on re monetization.

Do you think cash component of black money is still the same as it was before demonetization?

If cash is not horded in the same proportion as it was before demonetization then it is fine if we have lesser cash in circulation.

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