RBI monetary policy: Three questions Urjit Patel never answered on demonetisation pain
A rate cut or not wasn’t anyway the central question of today’s monetary policy, hence most questions at the post-policy presser weren’t about the status-quo announced in rates or inflation outlook, but on what RBI thinks about the demonetisation exercise that has pushed the nation to an unprecedented cash crunch. Patel’s presser disappointed in this backdrop, as the RBI governor didn’t say anything new or offered any further clarity on several critical issues, other than repeating what already was known to the public. The only exception to this is the announcement of the figure of Rs 11.55 lakh crore — the deposits that have already come back to the banking system either by exchanging or depositing old notes.
At the presser, Patel was largely singing the Narendra Modi-government’s tune on the demonetisation issue. The governor played down the impact of the demonetisation process on the economy beyond the short term, contradicting what the many private economists have warned. Patel also made it a point to state that there is no ‘trust deficit’ in the public post the demonetisation and even said most people are lauding the government's move that will help curb black money, terror funding and fake currency in the system. It isn’t clear how does Patel knows people are happy or not about the note ban, without the backing of any detailed surveys. The governor also spoke about the benefit of moving to a cashless economy, something the government too has been highlighting all along. Here, the key take away is that Patel made all possible efforts to not give any room for demonetisation-critics to speculate that RBI and government are not on the same page.
Patel’s clarification that there won’t be any special dividend to the government post the demonetization exercise is largely irrelevant now because already close to Rs 12 lakh crore money have come back to the banking system out of the Rs 14 lakh demonetized on 8 November. But, this admission from the RBI officially rules out the speculations of “windfall” from the RBI to government and raises questions on what will be the tangible gains to the economy at the end of this painful exercise.
There were no adequate explanations in the presser on the repeated flip-flops in rules and lack of transparency seen in the whole exercise of currency ban so far—in the presser. This is disappointing given that after his long silence since 8 November (when Prime Minister Narendra Modi announced the government decision to demonetise the Rs 500, Rs 1,000 currency notes from midnight in a televised statement), the governor was expected to clear the air on the issue.
Here are the three things Patel should have clarified in today’s presser.
First, at the presser, Patel said demonetisation was a very well planned exercise. If that is the case how the serious flaws in implementation that resulted in pain to the public and a massive hit to economic activities happened in the first place? Also, why the currency shortage is still continuing even after a month? If it is a well thought out operation, how come a series of flip-flops in rules happened when the rules were changed on almost every week on the deadline to exchange the old notes with new notes, cash withdrawal limits from branches and ATMs and bank branches. Doesn’t this dent RBI’s stature among public?
This is an issue former Prime Minister, Manmohan Singh highlighted in his parliament speech. The comment of the former PM and ex-RBI governor merits a mention. “It is no good that every day the banking system comes with modification of the rules, the conditions under which the people can withdraw money. That reflects very poorly on the Prime Minister’s office, on the Finance Minister’s office and on the Reserve Bank of India. I am very sorry that the Reserve Bank of India has been exposed to this sort of criticism which I think is fully justified.”
Second, where is transparency in the whole process that was warranted given the seriousness of the operation? The RBI has taken painstaking efforts to ensure transparency in its operations over the years. But, that isn’t the case so far in the demonetisation exercise. For instance, for nearly a month after the note ban move, the central bank governor has failed to give proper guidance to the general public on the currency situation when the entire nation was passing through the prolonging phase of cash shortage.
There was no adequate communication from the governor, the face of the RBI, to the public on the prevailing situation on the ground post demonetisation announcement. For instance, the last statement issued by the RBI on the amount of deposits banks have received through the exchange/deposit of old notes was on 28 November . There was no official communication since then. Also there was no guidance on how long the pain will last. What is holding back the central bank from being transparent on an issue that has a painful impact on millions of common people? Patel should have explained.
Third, persisting uncertainty isn’t good for any economy. Patel didn’t offer clarity on how long the currency crunch will last in the economy or what will be its actual impact on growth. Despite the assurances from the government, RBI governor’s silence on the issue has been a worrying aspect for market participants. This is because on matters concerning the economy, investors tend to attach more value the words of the central bank of an economy, than the statements from political incumbents. Patel should have given clarity on the likely period of cash crunch and its impact, which he didn’t do at the presser.
Another larger question, which is less discussed is something CLSA economist Rajeev Malik argues in his open letter to Patel that he highlighted in his livemint column. Malik argued that if any government can announce one fine day that some denomination currencies are illegal, then what about RBI’s promise on the paper? As Malik says, “one wonders why anyone in future should believe RBI’s promise to pay the bearer of its fiat currency when any government can decide—for whatever reason—to make some denomination of its currency illegal, and that automatically absolves the central bank of its promise to pay the bearer.” The RBI, which is the constitutional authority of the currency, owes an answer to this question.
A rate cut or status quo at this stage doesn’t make much difference, when the reason for low bank credit off take is mainly due to poor economic activities and high NPAs (non-performing assets). Hence, even a rate cut wouldn’t have meant much to the economy as noted in an earlier column. But, what is more worrying to see is RBI governor Urjit Patel’s reluctance on lack of clarity on several issues at today’s presser.
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