Archive for the ‘Central Banks / Monetary Policy’ Category

On its own, RBI decides 26 areas to be out-of-bounds under the RTI Act…

December 16, 2016

Interesting investigation from Vinita Deshmukh, consulting editor of Moneylife who is also an RTI activist.

She says those who thought secrets of RBI hand in demonetisation could be revealed via RTI are bound to be disappointed:


Demonetisation History: When Saddam Hussein demonetised Iraqi currency in 1993

December 16, 2016

This is a brilliant speech by Mervyn King, Former chief of Bank of England.

The speech is in a different context. It is on importance of monetary institutions and how they shape expectations. But in this he discusses the Iraq experience which is highly relevant for today’s discourse. The speech cannot be extracted due to security so here is a broad summary.

He points how Iraq was divided into two parts in 1992 – North and South with latter under control of Saddam. Due to restrictions imposed by West, Saddam decided to do deficit financing. Till then Iraq imported notes made elsewhere but they were not available anymore due to restrictions. This led Saddam to print new currency notes on an inferior paper with his image. He even demonetised ths highest denom note of 25 Dinars and asked it to be exchanged with Saddam Dinars. Eventually the Saddam regime printed many more dinars than required leading to high inflation. Plus, the Saddam DInar could be easily counterfeited as it was on poor paper and low tech.

Meanwhile in the North, the old currency continued as no avenue for exchange. No extra notes could be printed as there was no mon authority.

This presence of irresponsible policy and absence of any policy panned out differently as it became clear that Saddam regime will collapse. The North currency called Swiss Dinar appreciated as things were far more stable there.

Fascinating stuff. Time to dig in old speeches of former central bankers…

Demonetisation in US on 14 July 1969: How relevant is it for comparing with India’s demonetisation in 2016?

December 16, 2016

Anil Bokil, member of the Pune-based ArthaKranti Pratishthan is seen as the person behind India’s demonetisation drive in 2016. Despite the fact that this exercise is hardly anything new and has been done twice in the past (with little success), we take it to be some new thing designed by someone else.

Mr Bokil in this latest interview in ToI points to demonetisation in US on 14 July 1969:


Tracking Venezuela’s inflation by Bloomberg Cafe Con Leche Inflation Index

December 16, 2016

It is around 1526% as per this new index:

Inflation is soaring in Venezuela. Everyone knows that.

But how high is it really? 250 percent a year? 500 percent? 1,000 percent? None of the above? In the absence of official data — the government long ago stopped publishing figures on a regular basis — economists are left to dial up what are, essentially, wild guesses.

Enter the Bloomberg Cafe Con Leche Inflation Index.

In an effort to fill the void, Bloomberg News has launched its own inflation gauge. It’s not necessarily the most scientific in the world, true. As the name would suggest, it tracks just one item: a cup of cafe con leche served piping hot at a bakery in eastern Caracas. For all of the index’s shortcomings, it has merits too: it’s tangible; tracked regularly; and, given that it monitors a product consumed by Venezuelans everyday, provides a unique, up-close look at inflation in one of the most dysfunctional economies on earth.

The index debuts today at an annual rate of 1,526 percent, the result of the price having soared from 450 bolivars per cup to 1,100 bolivars* over a span of 17 weeks. At this pace, or anything even remotely close to it, Venezuela would have the highest inflation in the world. Stay tuned for further readings in coming weeks.


RBI’s Central Board meeting at Kolkata (on 15 Dec 2016) becomes a sad tragedy..

December 15, 2016

The attention is clearly on RBI’s Central Board and its meetings. All this while way too much attention has been paid on the Monetary Policy Committee but one of the most (if not the most) decisions in India’s monetary history (or world’s) has been taken by the RBI Central Board.

It seems after the highly eventful meeting on 8 Nov 2016 , the Board met for the first time in Kolkata today (15 Dec 2016). Sadly it seems there was some tragedy on Kolkata Airport as RBI Governor was heckled and shown black flags. Much of it was expected!

This is all so sad. There is a reason why experts say that RBI should not have been involved into this demonetisation drive. It should have happened via the Parliament route. What were basically unknown events even to the financial media and experts have become a boiling point for political parties.

I don’t even know why this Board meeting was kept at Kolkata at first place given the turbulent political relations between Centre and State. They could have kept it in some place or let it be another secret meeting. It is sad that RBI and its Governor are feeling the brunt of politics. This is what one feared.

The  press release reporting the Board meeting is as parsimonious as it could be:


The usage of cash in Australia (and other countries) – Current trends and future..

December 15, 2016

As talks of Australia following India grow, here is a nice note by its central bank economists on cash usage in Australia.

The authors say cash usage has declined in Aus but still remains important:

Australian consumers have increasingly been using electronic payment methods in preference to cash for their transactions. The overall demand for cash in Australia, however, remains strong. There is ongoing demand for cash for non-transaction purposes, particularly as a store of wealth. While the role of cash in society is evolving, it is likely to remain an important feature of the payments system and economy for the foreseeable future. Moreover, the current mix of banknote denominations continues to meet community demand for a secure means of payment and store of wealth. Given the ongoing importance of cash, the Reserve Bank will maintain the public’s confidence in Australia’s banknotes by continuing to ensure that banknotes are of high quality and secure from counterfeiting.

Is it a reminder to the Government as well?

They also shows how cash usage is the highest amidst old age compared to younger lot which is on expected lines.

The authors  look at cash usage trends in other countries and sees there is a gradual decline towards less cash economy. Germany and Austria continue to transact nearly 80% of transactions in cash. Sweden is the lowest at 15%!

Nice realistic assessment on cash usage in Australia.

Update on Venezuela demonetisation – Central Bank to exchange only ‘rational’ amount of cash…

December 14, 2016

Venezuela just demonetised its currency.  Unlike India, here demonetisation was just waiting to happen given the spiralling inflation. People  anways needed loads of cash to buy even basic essentials. So, they had to issue higher denomiation notes which they kept delaying. So finally first they said higher notes shall be issued and then a few days later knocked off the highest existing currency of 100 Bolivar.

This has made chaos even worse as people struggle to exchange their 100 notes into other denominations.

And now to add further to the woes, Venezuelan central bank says it will not exchange people bringing truckload of cash:


What Plant and animal symbolism can be found in the Bank of England?

December 14, 2016

Central Banks are trying to connect with all possible walks of life. After destroying much of the financial life to which they were directly involved, they have moved to animal and plant life!

Bank of England Knowledge Bank has an interesting post showing “various plants, animals and mythical creatures around the Bank of England. Together they tell a story about our history, purpose and values.”


As demonetisation fever rises across the world, a look at respective Central Banks’ laws on demonetisation…

December 14, 2016

After inspiring Venezuela, Indian could inspire Australia too. Though, Australian one already under the pipeline, it is unlikely to shock  as it did in India. Whatever anyone chooses to do now, the shock and awe title clearly belongs to India as of now.

As the recent demonetisation in India was driven  using the Indian Central Bank Act, it is interesting to what other central bank acts have to say on demonetisation/withdrawal.

So this blog tried to read through several central bank acts. Some initial findings:

  • Only Mauritius and Philipines mention the word demonetise/demonetisation in their acts. Within these two, only Mauritius clearly has a section named as Demonetisation of currency notes and coins
  • Most countries call this withdrawal, if at all.
  • The powers to withdraw or demonetise are murky to say the least just like they were in India. The withdrawal or exchange is mainly provided in case of damaged notes.
  • Most say withdrawal to be done by Board or Ministry,  in Poland the President of the Bank can do it.
  • The information is to be published in Gazette of following countries : Pakistan, South Africa, New Zealand, Mauritius and Oman. This is due to the British colonial legal system which continues to be followed.
  • Some countries like New Zealand have clear punishment laws for anyone doing currency production other than their central bank.
  • Some countries also have clear laws on period under which ceased notes shall be accepted like Oman, Denmark, Norway etc. Most of the time this period is one year.

These are just some initial bits of information. Much more needs to be expanded and learnt.

Here is a list of central banks and the specific sections picked from their acts which deals with the subject. It is randomly done and not in any order. I will try and expand on this as and when. Request the readers to add as well..


Have Trump tweets replaced Fed speak?

December 14, 2016

Tho Bishop has a nice post, He points how US President-elect Donald Trump’s tweet handle has become the place for market players.

His Tweet handle has been actively dishing out fodder for players to speculate:


Inspired by India, Venezuela demonetises Bolivar 100 notes

December 13, 2016

As one worried, the Indian demonetisation exercise could inspire many other countries going ahead. After all if one can knock off 86% of currency in a country like India, it is much easier to do in other countries.

Venezuela is the first to follow which knocked off its highest denomination till date – Bolivar 100 – from circulation. The 100 note is worth just 2 cents and requires bags of notes to even buy a loaf of bread. It is estimated as 48% of the total currency circulation.

Obviously the contexts are very different. India was doing fine – it had steady growth, low inflation and so on. Venezuela had everything in opposite and it is not surprising to see its Government come out with some tricks to sideline the other major issues. But then most demonetisations in the past have happened to counter several economic malaise as well.

The President of Venezuela Nicholas Maduro said in the typical heroic fashion – we must keep beating the mafias:


What next after cash attack: Sealing open spaces to stop defecation?

December 12, 2016

Praveen Chakravarty has a nice article saying how government followed two different approaches for a similar cause. In pushing people to stop using open spaces for defecation and instead build toilets, it used the coax and nudge approach of Swachcha Bharat Abhiyaan. However, to push people to using digitial money, it followed the hammer approach of cutting the flow of cash:


Across the world, communities have embraced the opportunities of being demonetised

December 12, 2016

Well, if this was one of the intended outcomes of demonetisation it would have been welcome. The idea of community currencies and community sharing helps mitigate the pains of transacting in cash. However, as this was not the intention but we have seen some cases where these things have emerged. People have rallied for each other in some parts and tried to engage in some form of community currency as well.

Ashish Kothari in this piece points to how some people across the world have figured out life without fiat cash:

Demonetisation can actually contribute towards freeing ourselves from the shackles of governments, banks and corporations by helping us create more prosperous lives. But this is a very different kind of demonetisation.

On a recent visit to Beckerich, a commune in Luxembourg, I learnt about the beki, a community currency that has been in use since 2013. Equivalent to the euro in value, bekis can be used to pay for a host of local products and services – buying bread at the local baker, paying for local green energy, buying produce directly from farmers.

Max Hilbert, who facilitates the currency’s use for the commune, told me that the beki stimulates local production and services, and facilitates stronger local social relations as its use is based on knowing local producers and consumers.

Community or social currencies like the beki are increasingly being used across the world.

Launched in 2012, the Bristol pound in the city of Bristol, in England, is equivalent to the pound sterling in value and can be used to buy products and services at over 800 outlets in the city. Locals even use this currency to pay taxes, and the city’s former mayor, George Ferguson, took his entire salary in it. According to its website, the idea behind the Bristol pound was to boost local economic activity by “continual circulation of money within the local economy”.

Last month, in Spain, the city council of Barcelona introduced a pilot project to introduce a social currency, with euro parity, in a city district. The project is a bid to stimulate local businesses and will start in the new year.

There are several such examples from across the world.

There are also increasing initiatives for non-monetised exchange, such as sharing skills for free. In Athens, Greece, I met members of Mesopotamia, a network of about 400 individuals who are part of a time-sharing network. Several of them volunteer at a special learning centre for children.

In the UK, the network Spice Time Credits enables people to volunteer for activities that “strengthen communities” in exchange for credits that can be spent on an activity of their choice – including at theatres, museums and sports facilities – across the UK with partners of Spice Time Credits. At last count, the network has 25,000 members sharing over 4,00,000 hours, working with 1,200 organisations and services.

All this is just fascinating reading..

Is demonetisation notification illegal and violating the constitution?

December 12, 2016

One is amazed to read the news that Government is planning to change RBI Act now which will allow the central bank to annul the Rs 500 and Rs 1000 notes, In other words, one first uses the RBI Act to declare the existing series (whereas RBI Act just allowed any series) and now looks to change the RBI act to allow this to happen. I mean what is going on really?

Anyways, here is another piece by Namita Wahi of ET which argues that demonetisation notification is illegal and violates the constitution. There is a reason why RBI’s former top officials and other legal experts should throw more clarity on the issue. There is too much focus on economic consequences but it is legal issues that matter much more.

It is equally amazing to note that large section of markets and experts opined that RBI maintained its independence in the recent policy meeting. Really? Instead of asking central bank tough questions during the policy meet, the media just let things be.

Ongoing changes in RBI Balance Sheet…(update – 9/Nov/2016)

December 10, 2016

Ever since the demonetisation on 8-Nov-2016, there were lots of discussions on the impact on RBI Bal Sheet. As liquidity surged via deposits, we first saw rise in reverse repo transactions.

Then, on 26 Nov 2016 RBI made changes in CRR policy where entire liquidity was mapped by CRR.

In a review of the current liquidity conditions after the withdrawal of legal tender status of ₹ 500/- and ₹ 1000/-…. it has been decided…. effective from the fortnight beginning November 26, 2016 an incremental CRR of 100 per cent on the increase in NDTL between September 16, 2016 and November 11, 2016. As the incremental CRR is a temporary measure, it shall be reviewed on December 9, 2016 or even earlier.

Just a few days later on 2 Dec 2016, RBI and Govt undid CRR bit and increased the ceiling of MSS from Rs 15000 cr to Rs 6 lakh crore. Now all liquidity would be mapped by issuing Cash Management Bills.

So in the recent monetary policy on 7 Dec, this incremental CRR measure was withdrawn. RBI’s liquidity management obviously reflects its totally chaotic policy in recent days.

These quick and random changes led to RBI balance sheet changing so much in few weeks which it saw in many decades. AS RBI’s weekly balance sheet data started flowing, we first saw decline in currency mainly adjusting via increase in reverse repo, which is recorded in Deposits – Others.

Later as CRR kicked in from 26 Nov 2016, we see volumes shifting from Deposit- Others to Deposits – Scheduled Commercial Banks. This is because CRR deposits are registered under the Deposits – Scheduled Commercial Banks.

(Rs Billion) Nov. 25 Dec. 2 Variation
1 Notes Issued 11642.69 10307.98 –1,334.71
1.1 Notes in Circulation 11642.37 10307.82 –1,334.55
1.2 Notes held in Banking Department 0.32 0.16 –0.16
2 Deposits
2.1 Central Government 153.89 200.08 46.19
2.2 Market Stabilisation Scheme
2.3 State Governments 0.42 0.42
2.4 Scheduled Commercial Banks 4172.89 8536.36 4363.47
2.5 Scheduled State Co-operative Banks 35.79 61.63 25.84
2.6 Other Banks 246.75 573.98 327.23
2.7 Others 6779.54 3341.21 –3,438.33
3 Other Liabilities 9672.21 9817.49 145.28
TOTAL LIABILITIES/ASSETS 32704.18 32839.15 134.97
1 Foreign Currency Assets 23592.59 23510.9 –81.69
2 Gold Coin and Bullion 1367.94 1369.35 1.41
3 Rupee Securities (including Treasury Bills) 7564.53 7742.5 177.97
4 Loans and Advances
4.1 Central Government
4.2 State Governments 14.21 –14.21
4.4 Scheduled Commercial Banks 30.7 83.02 52.32
4.5 Scheduled State Co-op.Banks
4.6 Industrial Development Bank of India
4.7 Export- Import Bank of India
4.8 Others 28.67 34.94 6.27
5 Bills Purchased and Discounted
5.1 Commercial
5.2 Treasury
6 Investments 23.2 23.2
7 Other Assets 82.34 75.24 –7.10


  • As we can see currency in circulation continues to decline.
  • The adjustment shifts from Deposit-Others (which had reverse repo) to Deposit – Scheduled Commercial Banks,  Scheduled State Co-operative Banks and Other Banks.
  • Other Banks include Regional Rural Banks (RRBs), Other Scheduled Co-operative Bank, Non-Scheduled Commercial Banks, Other Cooperative Banks and Other Banks (including Central Co-operative Banks and primary co-operative banks).
  • This is obviously on account of incremental CRR which increased from 4,173.3 cr on Nov 27 to 9,049.7 Cr on Nov 28. CRR applies to Scheduled Commercial Banks/ Regional Rural Banks / all Scheduled Primary (Urban) Co-operative Banks / all Scheduled State Co-operative Banks.
  • So, we see all these categories together absorbing nearly 4.71 lakh crore of liquidity
  • AS CRR is removed from 9 Dec 2016 and MSS kicks in, we will see this amount shifting to Deposits – Market Stabilisation Scheme.




Meanwhile, Canada chooses its first woman to feature on the new 10 Dollar bill..

December 9, 2016

This bit is interesting news from Canadian shores. The Canadians chose Viola Desmond to feature on its new $10 bank note.

She was chosen from 461 candidates. Stephen Poloz, Chief of Bank of Canada explains the process:


What former RBI top officials should be telling us about the demonetisation drive…

December 8, 2016

One has been getting some bit of coverage from RBI top officials on the recent demonetisation drive.


When South Korea printed currency for India (and other Asian countries)…

December 6, 2016

The industrial organisation of currency printing industry is indeed fascinating and full of conspiracy theory. So far the basic impression was that most of currency printing was done by Europeans.

Not really as South Korea too is part of the game.

Sojin Shin, a research fellow at the National University of Singapore has a fascinating piece in EPW on this:

Many Asian countries in the 1980s lacked sufficient currency. In most cases, the shortage stemmed from not only the lack of technology to establish mints but also the lack of capacity to produce sufficient high quality currency.

In the currency shortage crises, South Korea was the leader of exporting banknotes and coins to many countries in Asia. Considering that importing domestic currencies from foreign countries may involve financial security setbacks, South Korea exporting currencies at that time meant two more things beyond its obvious success in business. First, South Korea’s moneymaking technology was advanced enough to compete with other Western countries exporting currencies to Asia. Second, the bilateral relations between South Korea and the Asian countries that requested money production had to be based on trust.

There was a domestic currency shortage in the 1980s in India. The Government of India (GoI) needed to import coins to cater to the demand of the people. Three mints—Hyderabad, Bombay, and Calcutta—were producing coins at that time, but their capacity did not meet requirements. They produced 525 million coins in 1981–82, 650 million pieces in 1982–83, and 1 billion pieces in 1983–84. The GoI targeted to provide 2 billion coins in 1985. However, the capacity of the three mints was only around 1.3 billion pieces.

The lack of capacity to produce coins became the trigger for the Coinage (Amendment) Bill in 1985. Vishwanath Pratap Singh, the then Minister of Finance and Commerce proposed the Coinage (Amendment) Bill in Parliament to import coins from foreign countries (GoI 1985). Many of the members of Parliament (MPs) criticised the government’s inability to address the issue. They pointed out that the Reserve Bank of India (RBI) did not adequately lift coins from the mints. The shortage of coins meant that the weaker section of citizens using them more often encountered difficulties. The proposition made some MPs more upset over the agenda. Further, MPs were worried about financial security, as minting of coins in other countries may lead to currency smuggling.

Despite these concerns, the GoI decided to import coins from other nations to meet the target of securing 2 billion coins in 1985–86. Three foreign mints were asked to produce coins for India: Birmingham Mint in the United Kingdom, Korea Minting Security Printing and ID Card Operating Corporation (KOMSCO) in South Korea, and Royal Canadian Mint in Canada. Table 1 presents the number of coins imported from the three foreign countries to India during the period 1985–87 (GoI 1988). The total cost for the imported coins was around ₹300 crore at that time.


Likewise Koreans printed notes for Bangladesh (first contract) and then did tech transfer of currency printing to Bhutan as well.

In then end, we must remember “Made in Korea” notes are critical when it comes to diplomacy:

South Korea’s moneymaking technology was well known not only in South Asia but also in other Asian countries such as China, Philippines, Thailand, Indonesia, and Singapore. KOMSCO exported $72 thousand worth of 1 and 5 yuan coins to China from 1973 to 1982. For the Philippines, it supplied seven types of government stamps from 1972 to 1980. KOMSCO made a contract with the Thai government in 1985 to provide $720 thousand worth of banknote paper for 50 baht bills. It continued to export the banknote paper for 50 baht and 500 baht bills to Thailand until the early 1990s. In 1986, KOMSCO shipped 116 million pieces of three different types of coins—10, 20, and 50 cent—to Singapore.

South Korea’s exporting currencies to these countries at that time meant something beyond its success of business, because importing domestic currencies from foreign countries may involve financial security setbacks. It meant that not only was South Korea’s moneymaking technology of high standard, but it also meant that South Korea’s bilateral relations with various countries were based on trust. India, Bangladesh, Bhutan, and Pakistan were the countries in South Asia where “made-in-Korea” banknotes and coins were circulated. Further, South Korea’s moneymaking technology transfer to Bhutan was significant in a sense that possessing and producing unique national currencies is closely linked to national monetary strength.

Superb stuff.

Was Volcker disinflation actually Burns disinflation?

December 6, 2016

The hype of any policy usually has its precedents elsewhere.

This is a terrific paper by Thomas A. Lubik, Christian Matthes and Tim Sablik. They say that disinflation in 1980s was not due to Paul Volcker but started in previous tenure of Arthur Burns:


Why it is important to define money correctly..

December 2, 2016

An interesting and timely piece by Frank Shostak.

He says currently we are trying to take out new measures for money just to fit their correlation with economic indicators. This is no way to define money: