Monthly Archives: December 2016

Give It Up!

“Give It Up!” (German: “Gibs auf!”), written by Franz Kafka between 1917 and 1923, first appeared in Beschreibung eines Kampfes (1936, Description of a Struggle, translated 1958). See here.

It was very early in the morning, the streets clean and deserted, I was on my way to the station. As I compared the tower clock with my watch I realized it was much later than I had thought and that I had to hurry; the shock of this discovery made me feel uncertain of the way, I wasn’t very well acquainted with the town as yet; fortunately, there was a policeman at hand, I ran to him and breathlessly asked him the way. He smiled and said:

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The Rise Of Chatbots And The End Of Call Centres

Chatbots are software entities that can carry on a conversation with a human, using voice or text. They have started to replace many call centre functions, and current technological projections suggest that human-staffed call centres will soon become a thing of the past.

Traditional chatbots use pattern matching, i.e., they look up phrases from a database that match keywords from the input. The recent excitement is over the development of much more powerful machine learning methods that allow chatbots to actually understand conversation using natural language processing, and get progressively better at doing so. The new chatbots can use both text and voice, and have built in functions for information lookup and fault diagnostics. These new chatbots have already been widely deployed in customer service functions, as frontline systems for telephone or web based ordering, grievance address and technical help systems. They have already been deployed by Taco Bell, Amtrak, Aetna, Mattel, Disney, and many other companies.

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Indian Equities Modestly Lower, Suggest No Recession

Indian equities have declined since Nov 8, although as we reported earlier, much of the down move has coincided with a worldwide move from emerging markets to U.S. equities. In addition to the global emerging market decline, there is a modest down move specific to India, but it is not nearly enough to suggest a recession in 2017.

niftyem

As the chart above shows, the Nifty 500 Index of Indian stocks has declined relative to the Global Emerging Markets Index since Nov 8. However, the net decline is only about 5% from the high, and about 2% from Nov 8. The absolute decline in the Nifty 500 Index since Nov 8 is about 5%. These are modest declines, in line with a moderate slowing in growth. Since the interest rate decline is probably going to be limited to about 50 basis points, the Dividend Growth Model suggests that the growth slowdown expected by the stock market is about 75-100 basis points.

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Did Four Trillion Rupees Drop From The Sky?

Where do bank notes come from? Do they drop from the sky?

According to figures published by the RBI, currency in circulation increased by Rs. 8 trillion in Nov, but only Rs. 4 trillion was withdrawn or exchanged from banks and ATMs by the public. Where did the remaining Rs. 4 trillion come from? How did it get into circulation?

The value of 500 and 1000 rupee banknotes in circulation was Rs. 12.2 trillion in Mar 2015 and Rs 14.2 trillion in Mar 2016, according to the RBI’s Annual Reports available here and here. It is a reasonable guess that their value increased by about Rs 1 trillion and stood at about Rs. 15.2 trillion on Nov 8, when their status as legal tender was withdrawn. This implies that currency in circulation fell by 15 trillion on Nov 8.

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A Contrary Interpretation Of The Surprise RBI Pause

In a surprise move, the Monetary Policy Committee of the Reserve Bank of India left interest rates unchanged in Dec, dashing widespread hopes of a 25 or even a 50 basis point rate cut. This has been praised as a bold and independent step, but but an analysis of the RBI statement shows that its reading of demonetisation is entirely in line with the government’s thinking on the matter.

The statement released by the RBI yesterday provides several surprises:

  1. The RBI is still worried about food price inflation and does not think that “withdrawal of specified bank notes (SBN)” would cause a major reduction of overall inflation beyond a slight transitory effect. Indeed, they feel that the risks to its inflation forecast are on the up side!
  2. The RBI’s estimate of the effect of “SBN withdrawal” on growth is quite low, of the order of half percent, with evenly balanced risks! That means, as Chart 2 in RBI’s statement shows, that FY-2017 growth is as likely to exceed 8% as it is to decline below 6%.
  3. The RBI remains more worried about overshooting its inflation target than about any growth slowdown caused by SBN withdrawal. This is why it has decided to pause.
  4. Another major surprise that emerged at the Press Conference was Governor Patel ruling out of any “demonetisation dividend”. While it had become clear that this was unlikely anyway, and as we have pointed out, the government has backtracked on this from the very outset, now official confirmation has come that this will not happen.

Overall, the statement and the post-policy conference shows that the RBI is convinced that the effect of demonetisation on both inflation and growth would be minor and transitory, and does not merit even a 25 point rate cut. The growth slowdown estimates are at the very mild end of the range and significantly milder than our own extremely dire outlook.. This is very much in line with the government’s thinking, and therefore we should see this rate decision not as a bold defiance of the government, but rather the opposite, i.e., further evidence that the RBI is entirely in agreement with the government on the demonetisation decision and its aftermath.

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Urjit Agonistes

Reserve Bank of India Governor Dr. Urjit Patel has a long struggle ahead of him. One part of it will be to manage monetary policy through a very tricky and complex period. Another, and even bigger struggle will be to rescue the reputation of the central bank from the harm done to it by the way demonetisation has been handled.

The decision Governor Patel has to make today, for today’s Policy Meeting, is probably an easy one. Almost all observers expect him to cut rates by 25 basis points. If he decides to go the extra distance, and cut by 50 basis points, it would be a welcome surprise, but not a massive one. Anything else is pretty much ruled out.

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Cash Crunch Could Cause A Deep Recession In India

Current estimates of the slowdown caused by demonetisation run between 0.5% and 3.0%. This is probably too optimistic, and our analysis suggests that the disruptions caused by demonetisation would be much worse, and may very well trigger a recession in 2017.

The total currency in circulation before demonetisation was about Rs. 17 trillion, with about Rs. 11 trillion in the legitimate economy, of which 8 trillion were in notes that are canceled now. The capacity of currency printing suggests that replenishment of these notes would take at least until Feb. This will cause a currency shortfall of 45% in Nov, 25% in Dec, 20% in Jan and 15% in Feb.

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The Leak That Wasn’t

There has been a lot of speculation about a spike in bank deposits in Sep 2016 and whether it implies that there was a leak of the demonetisation decision. A statistical analysis of the time series of fortnightly bank deposits shows no clear evidence of a leak.

A recent article in the Huffington Post posts a version of the following chart to support its point that “Nothing Quite Explains The Mammoth Spike In Bank Deposits Just Ahead Of Modi’s Demonetisation Announcement”. And indeed, the curve does seem to take a big jump at the end, during the fortnight ending Sep 30.

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Global Shift Towards U.S. Stocks Driving Indian Market Decline

Stock markets worldwide have pivoted towards the U.S. in the wake of Donald Trump’s election victory. Indian stocks have also declined during this period, but less than other emerging markets, suggesting that the decline is driven by Mr. Trump’s victory, not currency demonetisation.

Since 8th Nov, the S&P 500 Index of U.S. stocks has risen, while the MSCI ACWI ex-USA Index has declined. The brunt of the adjustment has fallen on emerging markets, with the MSCI EM Index down much more than the MSCI EAFE ex-US Developed Markets Index. In India, the NSE 500 Index is also down, but less than the EM Index. in a previous post we found that the Rupee’s decline against the U.S. Dollar in Nov has also been driven by anticipations surrounding Mr. Trump’s victory.

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