Monthly Archives: November 2016

Currency “Expiry” and the Trillion Rupee Dividend

Is there a final “expiry date” for the old 500 and 1000 Rupee bank notes? If we take our clue from the Prime Minster’s address to the nation on 8th Nov, then the last date for redeeming old notes seems to be 31 Mar 2017. The text of the address states, in step 10, that

10. (They) can go to specified offices of the Reserve Bank of India up to 31st March 2017 and deposit the notes after submitting a declaration form.

However, the Gazette Notification No 2652 issued by Government of India, a Press Release issued by the Finance Ministry, and a Notification issued by the RBI, all dated 08 Nov 2016, state that read more

The Rupee Is Plummeting! Or Is It?

The decline of the Indian Rupee (INR) in Nov has caused much lamentation among the financial cognoscenti, perhaps with a dash of schadenfreude in certain quarters. On closer inspection, however, it turns out to be an illusion that disappears when you tilt the picture the right way.

We start with a picture of the fall, the Dollar/Rupee (USDINR) exchange rate in Nov 2016. The down trend is evident and the total decline is almost 3%, a pretty big one-month move for the currency. (Data from read more

Indian Bank Stocks Are Getting Crushed

The Indian stock market peaked on 10 Nov, two days after the announcement of the demonetisation program. Since then, the benchmark Nifty 50 Index has declined 6.6% between 10 Nov and 24 Nov, and the Nifty Bank Index has declined substantially more, 9.6%, during the same period. Since many have claimed demonetisation would be a bonanza for banks, and that they would profit handsomely from the surge in deposits, this market move seems a bit odd.


In order to understand this, we start with the question, why should we expect increases in deposits to be good for a bank? After all, deposits are not bank assets, they are bank liabilities, and they cause a money outflow in the form of interest payments. Nevertheless, under normal conditions, an increase in deposits is, in fact, good news for a bank, since it allows the bank to grow its loan portfolio, usually by an amount that is considerably larger than their new deposits. Since the bank lending rate is higher than the deposit rate, this leads to higher net income for the bank. read more

Permanent Effects Of Demonetisation?

Some economists have suggested that demonetisation could permanently shrink the shadow economy of crimes, bureaucratic corruption, and tax evasion. Whether this happens will depend on whether demonetisation can destroy most of the current stock of black market cash. Our estimates suggest that this shadow currency stock was about 6T in Nov. If the quantity of extinguished currency turns out to be close to 6T, then we can expect the shadow economy to shrink substantially over time. If however, the extinguished quantity of currency is much lower than 6T, then we will know that black market operators have outwitted the currency vetting process and it is back to business as usual. If the amount is somewhere in the middle, we can conclude that demonetisation has taken a toll on illicit wealth, but probably has failed to deliver a fatal blow to future illicit activity. read more