RBI's dilemma

Well articulated and presented. The demonetisation risk has not been properly assessed is a fact and therefore the risk management seen subsequent to the implementation of the scheme cannot also be said to be effective. This is what has been experienced by the economy and the people for the last few days.  There is absolutely no dispute on the faulty implementation . However, the task is huge and the RBI a well reputed organisation for its competence and professionalism in managing what ever tasks it undertakes has unfortunately let down this time for every one to criticize. The consequences of demonetisation  could have been assessed well and the risks could have been very well minimised if not eliminated altogether. The Introduction of Rs 2000 notes could have been very well  avoided or at best restricted to metropolitan centres and all other areas could have been flooded with small denomination notes. The outsourced works could have been well monitored and RBI could have relaxed some administrative measures for fast, smooth and equitable distribution of its available stocks of notes to reach as many people as possible without disturbing the banks normal functions of accepting deposits and lending. A little planning in the initial stages could have helped implementation of the demonetisation scheme a great success. A stitch in time saves nine is what is demonstrated. To what extent RBI's independence in handling such a huge exercise has been eroded is not made transparent as the Government's interference in RBI's functioning these days is too much and it has perhaps lost its strength and credibility to vent its views to the Government. The coordinated approach from the government and RBI without undermining RBI's own reputation and professionalism could have brought in better results. All said RBI will have its own reasoning for the lapses which need to be adequately captured and factored into while writing the History as and when attempted. It is an Institution which has faced criticism but has always been adjudged as one of the best Central bankers of the world.

Dr T V Gopalakrishnan

(This comment apperaed in Money Life against the article on Demon of demonetisation. on the 23rd of December)

Biased views from Dr Manmohan Singh and Dr Amartya Sen

Both Dr Amarya Sen and Dr Manmohan Singh seem to be biased on the issue of demonetisation  and their observations have not come out of their knowledge of economics.Being eminent professionals, having international experience and knowledge of evils of corruption, black and fake money faced by the emerging economies in particular,both should not have come out with such harsh statements on demonetisation. The economy needs lots of clean up and the PM with all resistance and opposition shows some conviction and guts to take some very bold steps risking his own party's prospects in the next election. The economy has been facing all sorts of problems because of corruption, heavy accumulation of illegal wealth in the form of cash, gold, real estate , assets abroad and  all types of attendant issues like terrorism, high inflation, erratic data on vital issues like GDP growth, employment, distribution of wealth , allocation of subsidies, exports, imports , lack of capital for the much needed physical and social infrastructure. Unless and until the economy is cleaned first and corruption, black money and fake money are removed and the  ill effects of the mismanagement of the economy for several decades have been eliminated completely, the chances of the economy registering growth and distribution of wealth in an equitable and fair manner to remove the poverty once for all are very remote and the PM has no way but to take drastic measures even at the cost of facing some disruptions . Demonetisation is the first step and many more such drastic steps are needed. This is the time for professionals to view things in the right perspective and appreciate some politicians without the knowledge of the economics have come forward to take some corrective measures to put the economy on the right track. It is unfortunate that Dr Manmohan Singh and Dr Amartya Sen have different views and have opposed the PM's move to demonetisation tooth and nail without any rhyme or reason. 

Dr T V Gopalakrishnan      

Ball in Government's Court

This refers to your editorial Playing too safe (Business Line Dated 8/12/16). The monetary policy announced by the Reserve bank in the background of the demonetization of RS 500 and Rs 1000 notes has been very prudent and contrary to the expectations of the market, the banks and the Government. The Reserve Bank stood its ground and decided to pursue a conservative approach by keeping the policy rates unchanged and withdrawing the 100% CRR introduced to mop up the sudden liquidity faced by the banks thanks to sharp increase in deposits consequent upon the withdrawal of high denomination notes. RBI is right on its approach as the full impact of demonetization cannot be factored into this policy as things are in a fluid state to assess as to how the informal economy may get merged with the formal economy and to what extent the setbacks caused by cash withdrawals of a very high magnitude can be minimized through replacement of new notes, digitization of transactions and making the economic activities back in action in full swing. There is a definite time lag between the demonetization and remonetisation and this can have some short term pains to be offset by long term gains which cannot be fully accounted for in the present policy. The macro economic factors continue to remain stable and the RBI need not be unduly concerned at this juncture to effect policy changes. The rupee is some what stable, inflation is under control, the current account and fiscal deficit are very much manageable and there are possibilities of interest rate cut by banks themselves in the changed composition of their assets and liabilities thanks to demonetization. No doubt, there is a paramount need to stimulate the economy through enhanced demand for consumption, production, investment and fast pick up of credit for which more than the monetary policy, the fiscal policy can work wonders. RBI perhaps wants the Government to take the initiative in that direction which will also facilitate easy implementation of demonetization.

T V Gopalakrishnan

Bengaluru 76  

( Shortened Version of this letter has appeared in Business Line dated 9/12/16)

Monetary Policy on Right track.

Monetary Policy on Right track.

RBI's monetary policy announced today in the background of the demonetisation  has surprsied many and it is  definitely not as per the expectatiomns of the market. On the contrary,  RBI has firmly stood its ground and  the policy is on sound lines to favour the economy. It has kept the policy rates unchanged  and withdrawn the incremental CRR of 100 % introduced to suck the excess liquidity caused in banks due to steep increase in deposits consequent on the withdrawal of old notes of Rs 500 and Rs 1000 which can be  well taken care of by the Market Stabilisation Fund.  RBI has also well clarified through its policy  that the withdrawal of old notes would not add to the dividend of the Government and the remonetisation can bring in  some potential benefits over a period of time in the transparency and enhanced digitisation of transactions. RBI expects to have a moderate fall in GDP growth by 0.5%  in the current fiscal year  and the inflation to be benign. It is clear from the polcy that the augment of GDP is dependent on the polcy initiatives of the Government to attract investment, credit pick up and esae of doing business.        

Dr T V Gopalakrishnan

(This letter appeared in ET dated 8/12/2016)