Note Ban To Have Minimal Negative Effect On Rising Deposits

Mumbai: With over 80 per cent of the banned notes as of December 10 getting into the system as bank deposits, British brokerage HSBC has opined that the negative wealth shock may not be too high as originally feared.

While effective currency in circulation has fallen 60 per cent since demonetisation, showing a significant cash crunch, on the other hand 80 per cent of outstanding cancelled notes have made their way back to banks already, suggesting that the negative wealth shock may not be too high, HSBC India chief economist Pranjul Bhandari said in a note today.

In the initial days of the note'Note ban to have minimal negative effect on rising deposits'
Mumbai, Dec 14 (PTI) With over 80 per cent of the banned notes as of December 10 getting into the system as bank deposits, British brokerage HSBC has opined that the negative wealth shock may not be too high as originally feared.

While effective currency in circulation has fallen 60 per cent since demonetisation, showing a significant cash crunch, on the other hand 80 per cent of outstanding cancelled notes have made their way back to banks already, suggesting that the negative wealth shock may not be too high, HSBC India chief economist Pranjul Bhandari said in a note today.

In the initial days of the note ban, the government and many analysts were predicting that at least 20 per cent of the banned notes of Rs 15.5 trillion (over Rs 3 trillion) would get cancelled, leading to a huge fiscal windfall for the government, as such an eventuality would have led to a write- down on the liabilities side of RBI balance-sheet of this magnitude and resultant surplus transfer to the government.

Yesterday, Reserve Bank said as much as Rs 12.44 trillion has come to banks as of December 10, up from Rs 11.55 trillion on December 7. With over a fortnight still left to the surrender window to close, it seems that almost the entire money would get back into bank deposits. Sensing this, the government has been changing its goalposts too, saying the note ban is aimed at making the economy less cash dependent.

Bhandari said, available data on deposits/withdrawals/ cash exchanges show that the effective currency in circulation which is the amount available for carrying out everyday transactions in the real economy, has fallen by 60 per cent between November 8 and December 8.

But she warned that this will have a debilitating impact on macro activity indicators ranging from falling
manufacturing and services PMIs, car production/sales.

"The latter, in particular, suggests that the investment outlook (proxied by commercial vehicles) is weak, and rural demand (proxied by two-wheelers) may have been hit more than urban (proxied by cars)," she said. Given the 60 per cent contraction on effective cash in circulation since November 10, we expect GDP growth to fall to 5 per cent in Q3 and 6 per cent in Q4, before it gradually normalises towards the 7 per cent ballpark, Bhandari said, adding sequential credit growth contraction of 1.2 per cent in November is another collateral damage of the demonetisation.

But on the positive side, she said the note banshocker has both CPI and WPI screeching southward, with the latter for November coming in at 3.63 per cent from  4.2 in October, and WPI at 3.15 per cent in November from 3.39 per cent in the previous month on fall in food prices due to
exercise.

Also, falling inflation should lead to a 25 bps cut in the repo in February policy, Bhandari said. As a whole, she warned that though the negative wealth shock may be limited, we cannot ignore the adjustment costs in the process of formalisation and digitisation.

the government and many analysts were predicting that at least 20 per cent of the banned notes of Rs 15.5 trillion (over Rs 3 trillion) would get cancelled, leading to a huge fiscal windfall for the government, as such an eventuality would have led to a write- down on the liabilities side of RBI balance-sheet of this magnitude and resultant surplus transfer to the government.

Yesterday, Reserve Bank said as much as Rs 12.44 trillion has come to banks as of December 10, up from Rs 11.55 trillion on December 7. With over a fortnight still left to the surrender window to close, it seems that almost the entire money would get back into bank deposits. Sensing this, the government has been changing its goalposts too, saying the note ban is aimed at making the economy less cash dependent.

Bhandari said, available data on deposits/withdrawals/ cash exchanges show that the effective currency in circulation which is the amount available for carrying out everyday transactions in the real economy, has fallen by 60 per cent between November 8 and December 8.

But she warned that this will have a debilitating impact on macro activity indicators ranging from falling manufacturing and services PMIs, car production/sales.

"The latter, in particular, suggests that the investment outlook (proxied by commercial vehicles) is weak, and rural demand (proxied by two-wheelers) may have been hit more than urban (proxied by cars)," she said.

Given the 60 per cent contraction on effective cash in circulation since November 10, we expect GDP growth to fall to 5 per cent in Q3 and 6 per cent in Q4, before it gradually normalises towards the 7 per cent ballpark, Bhandari said, adding sequential credit growth contraction of 1.2 per cent in November is another collateral damage of the demonetisation.

But on the positive side, she said the note ban shocker has both CPI and WPI screeching southward, with the latter for November coming in at 3.63 per cent from  4.2 in October, and WPI at 3.15 per cent in November from 3.39 per cent in the previous month on fall in food prices due to exercise. Also, falling inflation should lead to a 25 bps cut in the repo in February policy, Bhandari said.

As a whole, she warned that though the negative wealth shock may be limited, we cannot ignore the adjustment costs in the process of formalisation and digitisation.

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