20 Nov 2017
The implementation of India’s demonetisation programme overwhelmed banks to such an extent that key monetary benchmarks could have crashed and governments stocks wiped out, a central bank executive said in a speech on Tuesday.
The programme, which was announced in November last by Prime Minister Narendra Modi, outlawed about 86% of bank notes in the country in a move aimed at tackling corrupt money.
As the withdrawn currency notes were returned by the public, deposits flooded into banks and swamped them with idle reserves.
“A wall of liquidity started moving through financial markets, threatening to take down everything in its path – interest rates; yields; exchange rates; asset prices,” said the Reserve Bank of India’s Michael Debabrata Patra.
“Standing alone between the ocean of liquidity and financial chaos, the RBI mounted an extraordinary liquidity absorption strategy. It combined unconventional instruments with regular operations when the liquidity tsunami was so overwhelming that it could have completely depleted the RBI’s stock of government securities that are used as collateral in reverse repo auctions.”
Patra added that in order to “tide over the delay in obtaining market stabilisation scheme securities from the government, the incremental cash reserve ratio (ICRR) was deployed and for the first time in the RBI’s history, an ICRR of the size of 100 per cent of the relevant demand and time liabilities of banks was applied.”
Meanwhile, Nobel Economics laureate Richard Thaler has said he while he backed aspects of demonetisation, the introduction of a larger denomination added puzzlement.
In a tweet exchange with Swaraj Kumar, who is believed to be a student, Thaler said: “The concept was good as a move to a cashless society to impede corruption but the rollout was deeply flawed and the introduction of the Rs 2000 note makes the motivation for the entire exercise puzzling.”
The Rs 2000 were introduced after the ban of Rs 500 and Rs 1,000.
However, replacing smaller denominations with a higher value note is reported to have left people stuck [for change].
Despite various criticism, Modi’s BJP party has defended the demonetisation policy, saying it has led to a drop in currency circulation, which signifies some success in fulfilling a goal to transform India into a less-cash economy and hence reduce the flow of black money.
– By Irene Madongo
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