RBI’s Lack of Foresight and Transparency on the Impact of Demonetisation Is Disappointing

By avoiding questions on when the situation will normalise and suggesting that the growth forecast doesn’t take into account the transitory impact of demonetisation, Urjit Patel is shunning responsibility.

Office of the Reserve Bank of India. Credit: PTI

Office of the Reserve Bank of India. Credit: PTI

After abjectly surrendering to the Centre over the manner of demonetisation, the RBI seems to have somewhat asserted its institutional integrity by not cutting the interest rate even as finance minister Arun Jaitley had publicly raised hopes of a rate cut in view of banks getting flooded by deposits over the past month. The markets had already priced in a 25 to 50 basis point cut in interest rate, which of course did not come about. The stock market fell and yields on government bonds went up as an immediate reaction.

However, what is more worrisome is that the body language of the RBI governor clearly betrayed a lack of confidence about the behaviour of the economy in the near term. Urjit Patel chose not to directly answer key questions regarding when Indian citizens would be able to withdraw their money from banks without restrictions or when the RBI will complete printing of the entire Rs 15 lakh crore of currency invalidated on November 8. All the RBI said that was 25% of the currency had been replaced.  At this rate, the full replacement might not happen before March.

On pointed questions by the media, the deputy governor incharge kept repeating just one line,”It is under constant review”. It was a bit amusing to watch the RBI governor trying to put up a brave front yet directing all difficult questions to his deputies. This is clearly a contrast from previous governors, who fielded the most difficult questions upfront.

However, Patel did try to defend the Centre, even if unconvincingly, when he asserted that full planning was done before Prime Minister Narendra Modi announced the demonetisation. This just won’t pass muster. For if there is one thing clear to everyone in this messy episode, it is that there was very little planning. Which is what has caused so much pain to so many people, yet sadly the Centre still refuses describe this as anything more than “inconvenience”. Indeed, the prime minister and the finance minister are clearly conveying a sense of hubris in the way they are articulating the “inconvenience” to the people. The RBI too ended up rubbing salt in people’s wounds when Patel suggested, “The money in the bank is yours. It will remain yours”. He said it was only a transition problem. But the governor just would not tell us when this transition problem would end.

The very fact that the the RBI governor had to urge people not to think there was any “trust deficit” with regard to India’s legal tender is something for everyone to ponder. This is clearly an unprecedented situation created by one man’s desire to mobilise the entire population on a surreal war of “good against evil”. Unfortunately, the march of capitalism, to which this regime is committed, doesn’t work on such Manichean principles. Modi has clearly ended up using 80% of India’s poor as guinea pigs in this grand experiment. And there is no doubt the RBI has proved to be an accomplice in this process.

The RBI is also being less than transparent in suggesting that its growth forecast of 7% GDP for 2016-17 does not take into account the transitory impact of demonetisation. This is clearly tantamount to avoiding responsibility. There is enough evidence, in terms of fall in the economic activity and sales of companies, to show that output will decelerate in this quarter and the next. Even a qualitative comment on these lines would have shown that the RBI was alert to these events. This was missing in the statement.

The RBI did suggest that it was worried about rising food inflation, possibly due to near term supply shock due to disruption in rabi sowing and the gradual firming up of oil prices. The RBI was also largely silent on the huge costs that banks are incurring post demonetisation. All banking activity is at a standstill and banks are merely managing the logistics relating to providing currency. All this has a cost. There is a short term credit slowdown and fresh non performing assets from the small and medium industry will be a challenge. Overall, one expected a more rounded outlook on the medium term prospects of the economy and the health of the financial sector. The RBI avoided delving deeper on this. Clearly, it was a missed opportunity.