Archive for the ‘Central Banks / Monetary Policy’ Category

RBI’s assessment of impact of demonetisation on Indian economy…

March 10, 2017

A big surprise from RBI as it has released its assessment of impact of demonetisation on Indian economy. All this while the stunning silence of the central bank has been so puzzling and irritating.

There is nothing much to note as much is already known via multiple news items and analysis. The most awaited data of how much old notes came back to the system is still not there (atleast I could not find it in the big document).

The report says important consequence is rise in digital transactions which was not even the original objective:

Demonetisation announced on November 8, 2016 was aimed at addressing corruption, black money, counterfeit currency and terror financing. Although demonetisation holds huge potential benefits in the medium to long-term, given the scale of operation, it was expected to cause transient disruption in economic activity. The analysis in this paper suggests that demonetisation has impacted various sectors of the economy in varying degrees; however, in the affected sectors, the adverse impact was transient and felt mainly in November and December 2016. The impact moderated significantly in January 2017 and dissipated by and large by mid-February, reflecting the fast pace of remonetisation. The latest CSO estimates suggest that the impact of demonetisation on GVA growth was modest.

Currency squeeze due to demonetisation along with seasonal factors pushed food inflation significantly down but has not had much impact on inflation excluding food and fuel. A surge in deposits led to a sharp expansion in the consolidated balance sheet of scheduled commercial banks and created large surplus liquidity conditions. These were managed by the Reserve Bank of India through a mix of conventional and unconventional policy instruments. There has not been any significant impact on the external sector. There has been a sharp increase in the number of accounts under the Pradhan Mantri Jan Dhan Yojana and the deposits in such accounts have also surged. Financial re-intermediation may have received a boost following demonetisation.

An important consequence of demonetisation has been the sharp increase in the use of digital transactions.

It has lots of statistics which could be used for future analysis provided we can trust these numbers…

By now, we all know the impact was never intended to be on economics. The real impact always was to unsettle India’s political  environment.  In a brilliant set of moves, the government has used demonetisation to build a narrative around corrupt and non-corrupt nd has used it well during recent elctions.

How Indian central bank got itself to be centre of Indian politics is quite something. The success/failure of demonetisation is more likely to reflect in election results and not as much in economic data..

Central Bank embrace of Blockchain is all about control

March 10, 2017

When you can’t fight them, join them.

C.Jay Engel writes about how Chinese central bank is embracing blockchain technology:


Ghana introduces QR code in its currency notes..

March 10, 2017

Another interesting update on currency note design via

To celebrate its 60th anniversary, CEntral Bank of Ghana has introduced a new 5 cedis note with a QR code. See page 13 of pdf…


Somalia likely to print its first currency since 1991..

March 10, 2017

Somalia is likely to introduce its own printed currency for the first time since 1991 (HT:


State of Texas planning to allow bitcoins as legal tender along with precious metals…

March 8, 2017

I just blogged about State of Idaho and Arizona are planning to allow precious metals like gold and silver to become legal tender.

State of Texas (which has the veto to move out of US) is going further by even proposing to allow digital currencies like bitcoin to become legal tender:

A joint resolution introduced in the Texas House proposes a state constitutional amendment to guarantee the right to own, hold and use any mutually agreed upon medium of exchange. Passage of the bill would take another step toward undermining the Federal Reserve’s monopoly on money.

Rep. Matt Schaefer (R-Tyler) introduced House Join Resolution 89 (HJR89) on March 2. If passed, the resolution would place a constitutional amendment on the ballot recognizing the right of the people to own, hold, and use a mutually agreed upon medium of exchange, including cash, coin, bullion, digital currency, or privately issued scrip. The proposal would add the following language to the Texas state constitution.

“The right of the people to own, hold, and use a mutually agreed upon medium of exchange, including cash, coin, bullion, digital currency, or scrip, when trading and contracting for goods and services shall not be infringed. No government shall prohibit or encumber the ownership or holding of any form or amount of money or other currency.”

In effect, passage of the bill would, as Ron Paul has often said, “legalize the Constitution” by treating gold and silver specie as money. Professor William Greene, an expert on constitutional tender, noted that the proposal would introduce competition with the Federal Reserve.  “By introducing competition in currency through ‘recognizing the right of the people to own, hold, and use’ bullion such as gold and silver coins, passage of the amendment would take one more step toward the ultimate goal of ‘nullifying’ the Federal Reserve system,” he said.

The amendment would also protect the right to own and use digital currencies like bitcoin in the state.

The legislation builds on recent efforts in Texas to encourage sound money, such as the 2013 law eliminating sales taxes on gold and silver bullion, and the establishment of a precious metals state depository that can develop into a “hard money bank” for average citizens to use gold and silver in everyday transactions.

If passed by the legislature, the proposed amendment would go before the voters in Nov. 2017.

 Ultimate goal is to “Nullify the Federal Reserve System”. That is some goal to have.

Another expert says having Federal Reserve notes in Texas is unconstitutional:

Green explained how passage of the amendment would take another step toward nullifying the Fed’s monopoly on money.

As I noted in a paper I presented at the Mises Institute (“Ending the Federal Reserve from the Bottom Up“), when you introduce competition in currency, “[o]ver time, as residents of the State use both Federal Reserve Notes and silver and gold coins, the fact that the coins hold their value more than Federal Reserve Notes do will lead to a ‘reverse Gresham’s Law’ effect, where good money (gold and silver coins) will drive out bad money (Federal Reserve Notes).” Economist Peter Bernholz has labeled this “reverse Gresham’s law” as “Thiers’ Law,” after French politician and historian Adolphe Thiers.

As “Thiers’ Law” takes effect, a cascade of events can begin to occur, including the flow of real wealth toward the State’s treasury, an influx of banking business from outside of the State (as citizens residing in other States carry out their desire to bank with sound money), and an eventual outcry against the use of Federal Reserve Notes for any transactions. Far from causing economic destabilization, as monetary theorist and Constitutional scholar Edwin Vieira notes, a “more sound currency will simply supplant a less sound currency, by operation of the free market.” At that point, the Federal Reserve system will have become unwanted and irrelevant, and can be easily abolished by the people’s elected Representatives in Washington, D.C.

While praising the amendment as a good first step, Green said there is more to be done.

 If a full version of the Constitutional Tender Act were passed into law, then not only would the use of Federal Reserve Notes by the State be made illegal (because they are in violation of Article I, Section 10 of the U.S. Constitution); the use of legal tender U.S. gold and silver coins would be encouraged among the general population as well, along with any other currency that parties mutually consent to using. This would have three immediate effects: the elimination of FRNs from State transactions; the requirement of individuals and businesses to cease using FRNs in their transactions with the State; and (like HJR89) the introduction of competition in currencies among the general population. With all three effects working in tandem, the use of low-value pieces of paper issued by the Federal Reserve will become increasingly irrelevant, and an emaciated Federal Reserve system can much more easily be brought to an end — in essence, a de facto “nullification” by the State of the Federal Reserve itself.


Demand for sound money (declaring gold, silver, other metals as legal tender) rising in US States…

March 8, 2017

Both Idaho and Arizona are looking at allowing gold. silver etc to circulate as legal tender:


Are we all macroprudentialists?

March 7, 2017

Julien Noizet of Spontaneous Finance is back to blogging after a break. He questions the government/central bank intervention in financial matters.

In his recent post, he asks the question: Are we all macroprudentialists?


Central Bank of Nigeria’s forex crisis..

March 2, 2017

After Central Bank of Barbados crisis, something has been brewing in Central Bank of Nigeria too. Though, Barbados is unique in terms of what was seen and the Governorship issue not seen here. But on both countries exchange rate has become the bone of contention.

The currency had depreciated seriously in month of Feb leading to a new policy by the central bank. This has led to some immediate appreciation but overall concerns remain.

Nigeria is dependent on imports which are financed by oil exports. As oil prices dipped recently, the troubles started:

Without equivocation it can be stated that the present forex crisis is a consequence of the play out of several factors bordering on its acute scarcity and poor management of same. Import dependent as the Nigerian economy traditionally is, the fall in the international price of oil eroded over 50% of its forex earnings, leaving it with a drastic shortfall of the funds. Even at that the CBN gad been operating a most wasteful forex management regime in which at least 11 different rates are operational, which leaves a wide room for abuse and attendant leakage and wastages. Even with the present new regulations the apex bank seems not to have learnt its lessons especially as such pertains to the problem of multiple exchange rates.

In the light of the widespread abuse of the process the CBN should harmonise all official exchange rates into one, which can be linked with the floating market (black market rate), and adopt voucher schemes for any area in which it considers to grant concessions. The voucher scheme can be designed to incorporate tax reliefs and breaks for dedicated areas of the economy, where fiscal policy can provide additional targeted support. 

The ultimate panacea still remains the redesign of the country’s economic policy to favour a determined diversification of the economy in order to generate forex from sources other than oil and to also reduce this country’s near criminal dependence on all manner of foreign-made consumer goods.

Due to the oil shock, Nigeria had imposed stiff foreign exchange regulations earlier which have been undone recently. In Nov 2016, qz reported:

This isn’t the Central Bank’s first tactic to attempt to control the forex market. A year ago, with oil prices down and government earnings slowing, the apex bank adopted a fixed exchange rate as local banks put limits on spending on debit cards outside the country. In June, after several months of criticism of its currency policies, the Central Bank agreed to float the naira and allow the value of the currency be determined by market forces. But given the stability in the currency’s official value despite the devaluation, the Central Bank’s move was described as a “managed float.”

Despite its stated goal of trying to stabilize the foreign exchange market and resolve the persistent dollar shortage, the Central Bank has curiously made several moves that have worsened the crisis. It has barred banks from forex trading and cracked down on money transfer operators, an important source of forex for the local market through remittances from the diaspora (both bans were later lifted).

The bank’s unorthodox moves are believed to be backed by government which has also played its part in worsening an already bad situation. Last week, state security agents raided bureau de change operators accused of “unnecessarily hiking rates“, a move which has only worsened the dollar scarcity.

How these bans have similar story across countries. And how central bank eventually face the flak much of which is doing of the government, though that does not mean central banks have no faults.

This piece argues for a float of the Naira:

We are at this point because as revenue from crude oil sales have dropped drastically over the past two years, this administration has been insistent on not floating the naira against the advice of experts, both local and foreign.

As a result, the CBN has been dancing to its tune by trying ‘demand management’, cutting down the number of people accessing forex officially through the introduction of a list of 41 items for which importers cannot get cheap dollars. The end result is obvious – it has forced people to the parallel market and created such a wide difference between the official and black market price and allegations of a forex subsidy scam taking place.

The end results of the refusal to float the naira cannot be overemphasized: companies and manufacturers are starved of forex to import raw materials, leading to staff being laid off; foreign investors are staying away in order to avoid losing their investments, and the economy continues to lose overall as a result.

This new p0licy is the latest in a string of moves by the CBN and the Federal Government to make forex more available and cheaper but without floating the naira. This is because all other policies have failed: banning importers of certain items from accessing forex officially, claiming to float the naira but not really floating it, directing banks to not sell forex to international money transfer organizations, and then instructing them how to allocate their forex. All of these have failed in making forex available and cheaper.

 This is because the CBN is disregarding well-established laws of economics and trying to achieve this objective through the backdoor. Based on recent history, it is safe to say that this recent appreciation of the naira is only a temporary reprieve.

The CBN should stop trying to hide its head in the sand when it comes to knowing the solution to our monetary policy crisis and it should move ahead to genuinely float the naira.

On its own part, the Federal Government should throw its weight behind floating the currency, and then moving forward with the necessary reforms that will move our economy forward. Its continued insistence in not floating the naira is a primary reason that there is such a wide difference between official and parallel prices of the dollar and only makes it easier for people to engage in round-tripping.

The longer we refuse to do the necessary thing, the deeper we sink into this economic morass.


If plastic replaces cash much that is good will be lost…

March 2, 2017

Brett Scott has a one of the best pieces on war on cash written so far.  He sums up the issues nicely.

He first starts with his experience when one of the payment machines refused his card. Based on this, he writes how there are two kinds of cash. One is the physical fiat cash which we hold in hands and other is digital cash which we hold in our bank accounts. The latter one is used to make payments from one bank to another. Banks naturally hate the physical cash as they have to run ATMs etc to dispense the cash. They would love the digital world where money remains in hands of banks and they can keep playing with it.

However, there are two more players which are interested in war on cash:


Demand for Virtual currencies replacing traditional currency has always been there…Is this time any different?

March 2, 2017

RBI DG R Gandhi has a speech on two upcoming opportunities/threats in finacial industry – fintech and virtual currency (VC).

On VCs (there was a time when VC meant Venture Capital) he says this idea that VC will lead to death of currency is hardly new. These ideas have been there for a while:


60 years of Bundesbank..

March 1, 2017

The iconic Bundesbank completes its 60 years on 1 Aug 1917.

The bank is going to celebrate (but obviously) and has put up a seperate site giving a timeline of the history so far.

How did the Bundesbank become an independent institution? How were the German gold reserves created? And how did the D-Mark reach eastern Germany? In the anniversary year of 2017, the Bundesbank is looking back at its history and providing numerous opportunities for the public to get to know the central bank and its tasks.

On 1 August 1957, the Bundesbank Act came into force, making the Bundesbank the central bank of Germany. For sixty years it has ensured a stable currency – firstly supporting the D-Mark for a good four decades, and then the euro, Europe’s single currency, since 2002. “Our principal task is to safeguard the value of our currency. To accomplish this, we need the confidence and the support of the public,” said Bundesbank President Jens Weidmann at the beginning of the anniversary year.

On the occasion of its 60th anniversary, the Bundesbank is making a wide variety of information available to the general public. By means of online and printed media as well as numerous events all over Germany, members of the public can discover how the Bundesbank came into being and learn about formative events in its history and its tasks.

Nice bit to follow…

Lessons from Central Bank of Barbados fiasco: Central Bank chief is a goalkeeper?

February 28, 2017

Finally after much deliberations and total chaos, Dr DeLisle Worrell the governor of Central Bank of Barbados got fired. One of the Deputy Gvernors has been named as the new Governor.

Dr Worrell got fired just a day after the Court intervened that he could keep his position:


Future of cash: Cash is tried and tested and has a future (the Swiss view)..

February 28, 2017

Given the war on cash, a few “developed countries” like Germany and Swiss are not letting bills disappear that easily. They perhaps understand the issue of how cash prevents privacy much better than others. I shall not be surprised if there are deeper historical reasons behind them.

In this speech, Fritz Zurbrügg, Vice Chairman of the Governing Board of the Swiss National Bank defends cash.

The last few months and years have witnessed a growing debate on the future of cash. Its critics say that cash should be abolished, or that cashless alternatives will in any case gradually render it obsolete. However, to paraphrase Mark Twain: Reports of the death of cash have been greatly exaggerated.

This is reflected in the continuing robust demand for cash on the part of the general public. In many countries, the value of cash in circulation relative to GDP has increased over the last few years; a development that can be attributed to occasional periods of heightened uncertainty about the stability of banks in the wake of the financial crisis. Another factor is the low level of interest rates on transaction accounts, and hence the low opportunity cost of holding cash.

Moreover, surveys and anecdotal evidence suggest that cash is still widely and readily used for payments. This might seem surprising at first glance, given the numerous alternatives to cash, but there are a number of reasons. For instance, people like to use cash for personal reasons, because it allows more effective budget control or because it does not require technical know-how. People’s tastes can change, yet cash has properties that cashless methods do not have to the same extent. It is more reliable, because it does not depend on the use of a technical infrastructure. It also offers comprehensive protection as regards financial privacy. Only the availability of cash guarantees that the data owner really has control over the decision on how much financial information to share, and with whom.

In addition to these demand-side considerations, the SNB itself, as the supplier of banknotes, has no plans to do away with cash. The SNB is mandated by law to ensure the supply and distribution of cash as well as to facilitate and secure the smooth functioning of cashless payment systems. These tasks have equal status. By fulfilling both tasks, the SNB lays the groundwork for the public to choose its preferred method of payment for each individual transaction.

Yet this freedom of choice between payment methods exists only if the public has confidence in both cashless payments and cash. Prerequisites for public confidence in cash are, first, a monetary policy which is geared towards stability and ensures that banknotes and coins retain their value over the long term. Second, banknotes need to be of the highest quality and have the best possible protection against counterfeiting. Switzerland’s new banknote series is a case in point. It meets high standards of safety, design and technology. After all, banknotes are also a symbol for the quality and stability of our currency, as well as one of Switzerland’s ‘calling cards’.

It has to be seen for how long can these few dissenters against war on cash can continue…

The power and secrets of gold, central banking and what not: A case from Deutsche Bundesbank…

February 27, 2017

This is an interesting post by Norbert Häring which questions/exposes the secret world of central banking across the world. Just like the politicians who show they oppose each other, central banks too express their displeasure at monetary policy of other central banks. But in the evening just like warring politicians the central bankers too chill out with each other. It is a secretive murky world given how together they control the fortunes of so many.

Häring writes how recent Bundesbank announcement of shipping their own gold from NY Fed is being spinned nicely. The German bank portrays it like a victory but in reality it also calms the nerves of their American counterpart:


Demonetize huge amount onetime vs Demonetise smaller amounts frequently..

February 27, 2017

JP Koning’s blog keeps coming out with posts related to India’s demonetisation. Most people say demonetisation is over and not worth the time now. Well for  scholarship on monetary economics, India’s demonetisation deserves to be as widely researched a subject as any for many years. It just has so many facets to it.

In his recent post, Koning says instead of massive demonetisation drive onetime one could have smaller drives periodically. Interestingly in Philipines, Central Bank keeps withdrawing currency fairly regularly as well. Its central bank act says:

SECTION 56. Replacement of Currency Unfit for Circulation. — The Bangko Sentral shall withdraw from circulation and shall demonetize all notes and coins which for any reason whatsoever are unfit for circulation and shall replace them by adequate notes and coins: Provided, however, That the Bangko Sentral shall not replace notes and coins the identification of which is impossible, coins which show signs of filing, clipping or perforation, and notes which have lost more than two-fifths (2/5) of their surface or all of the signatures inscribed thereon. Notes and coins in such mutilated conditions shall be withdrawn from circulation and demonetized without compensation to the bearer.

SECTION 57. Retirement of Old Notes and Coins. — The Bangko Sentral may call in for replacement notes of any series or denomination which are more than five (5) years old and coins which are more than (10) years old.

Notes and coins called in for replacement in accordance with this provision shall remain legal tender for a period of one (1) year from the date of call. After this period, they shall cease to be legal tender but during the following year, or for such longer period as the Monetary Board may determine, they may be exchanged at par and without charge in the Bangko Sentral and by agents duly authorized by the Bangko Sentral for this purpose. After the expiration of this latter period, the notes and coins which have not been exchanged shall cease to be a liability of the Bangko Sentral and shall be demonetized. The Bangko Sentral shall also demonetize all notes and coins which have been called in and replaced.

But this is more about retiring old notes to keep counterfeiting etc at bay.

Koning says one way to achieve this regularly is by declaring notes having a particular serial number as losing legal tender status:

This continues a series of posts (1, 2, 3) I’ve been writing that tries to improve on Indian PM Narendra Modi’s clumsy demonetization, or what I prefer to call a policy of surprise note swaps.

The main goal of Modi’s demonetization (i.e. note swapping) is to attack holdings of so-called “black money,” or unaccounted cash. The problem here is that to have a genuine long-run effect on the behavior of illicit cash users, a policy of demonetization needs to be more than a one-off game. It needs to be a repeatable one. A credible threat of a repeat swap a few months down the road ensures that stocks of licit money don’t get rebuilt after the most recent swap. If that threat isn’t credible, then people will simply go back to old patterns of cash usage.


Weeding out rupee banknotes according to serial number rather than denomination would have allowed for a more refined policy along the lines advocated by Henry. Here’s how it would work. The government begins by declaring that all ₹1000 notes ending with the number 9 are henceforth illegal. Each person is granted a degree of protection from the note ban. Anyone owning an offending note can bring it to a bank to be swapped for a legitimate ₹1000 note (one that doesn’t end in 9). However, the government sets a limit on the number of demonetized notes that can be exchanged directly for legitimate notes, say no more than three. Anything above that can only be exchanged in person at a bank teller for deposits, which requires that they have an account (i.e. their anonymity will be lifted). Once an individual has deposited five notes in their account, all subsequent deposits of demonetized notes would require a good explanation for the notes’ provenance. Should the requisite paper trail be missing, the depositor gives up the entire amount.

The process begins anew a few months hence, the specific timing and banknote target being randomly chosen. So maybe thirteen months after the first swap, the government demonetizes all ₹500 notes ending in 6. Randomness prevents people from anticipating the move and hiding their illicit wealth in a different high denomination note. 

Too understand how this affects black money owners, consider someone who owns a large quantity of illicit ₹1000 banknotes, say ₹70 million (US$1 million, or 70,000 banknotes). This person faces the threat of losing 10% to the note swap. After all, when the 9s are called, odds are that he or she will have around 7,000 of them, of which only eight can be returned without requiring a paper trail. The owner can simply accept a continuing string of 10% losses each year as a cost of doing business.

Alternatively, they might protect themselves by converting their hoard into a competing store of value, say gold, bitcoin or low denomination rupee notes like ₹100s (which are not subject to the policy of ongoing swaps). If they flee high denomination notes, illicit cash users in a worse position than before the adoption of the policy of note swapping. Gold and small denomination notes have far higher storage and handling costs than ₹1000 banknote. And unlike gold and bitcoin, a banknote is both supremely liquid and stable.  

As for licit users of high denomination notes, the fact that the 10% clawback would not apply to them means they needn’t change their behavior. Nor would the poor, who are unlikely to be able to provide a paper trail, have to worry about the policy. Demonetizations would only occur in high denominations, in India’s case ₹500 and 1000s. The poor are less likely to own these in quantities above the three note limit.

Incidentally, readers may recognize a policy of repeat demonetizations as akin to a Gesell stamp tax, named after Silvio Gesell, who in 1916 proposed the idea of taxing currency holdings in order to increase the velocity of circulation. Greg Mankiw famously updated Gesell’s idea during the 2008 credit crisis to remove the zero lower bound. He did so by using serial numbers as the device for imposing a negative return rather than stamps. This post updates Mankiw’s idea, except rather than applying the tax to all cash it strikes only at illicit cash holdings, and does so in the name of an entirely different policy goal—attacking the underground economy, not removal of the zero lower bound.

A series of small serial number-based swaps seems like a better policy than Modi’s ham-handed demonetization of all ₹1000 and ₹500s. It would certainly do a better job of promoting a long-term decline in undocumented cash holdings and would do so by imposing a much smaller blast radius on the Indian public. There would be no currency shortages, huge lineups at banks, empty ATMs, or trades going unconsummated due to lack of paper money.

Not sure about this at all. Such measures always read like nice experiments but one has to see the overall context. India has massive amount of illiteracy and keeping people off guard regularly will create regular havocs. It is also important to note that Rs 500 and Rs 1000 notes are hardly high value given how inflation has eroded purchasing power over the years. Rs 500 atleast is used fairly common amidst even lower income people. So, it is not right to assume that poor will not be effected by repeated smaller demonetisation. Whether one time or regular, they are the ones who shall be hit given current denominations. Only if denominations are higher, can we even think of this measure.

Another problem shall be speculation against which number shall be demonetised next. Given how things work, markets are fairly good at guessing all this and we could see people refusing to accept notes even before the new demonetisation order. We have seen how Re 10 coin is not accepted despite being legal tender.

Any measures to manipulate currency usually backfire. People are way too smart than Governments think..

Vera Smith’s five reasons for central banks : Are They Any Good?

February 23, 2017

I doubt how many of today’s monetary scholars have read Vera Smith’s dissertation- The Rationale for a Central Bank? What must have been a must read some years ago is hardly part of any course these days. The thesis was written under Hayek’s supervision and looked at reasons behind formation of various central banks.  We take central banking for granted without looking at various ways in which they come in different countries.

Karl-Friedrich Israel has a piece in Mises Institute which looks at five reasons given by Smith for having a central bank. Smith gave these reasons during GOld Standard days. After many years, do the reasons remain valid?


The 10 rupee coin chaos in Karnataka and the fake Rs 2000 note from Children Bank of India..

February 22, 2017

The RBI chef recently said it is important to be thick skinned in such jobs. He also added that “everyone has agreed that not just the RBI, but the wider banking system has done a “Herculean job” over the last few months. Well it is fine to be thick skinned and congratulate oneself, but it is also important to respond to what is going on. However, thick skinned does not mean one becomes insensitive and stops responding completely.

Ever since the central bank agreed to unleash the demonetisation, the Re 10 coin has been one of the unintended victims. There are repeated rumors that this Rs 10 coin is not legal tender. It even got a rare response from the Central Bank on Nov 20 2016 that there is no such case and Re 10 remains legal. But no repeated assurances after that.

So once again the rumors built in Karnataka and no one is accepting the 10 rupee coin. The media reported this on 10 Feb but there is no official notice from the central bank. So people are not accepting the Rs 10 coin in Bangalore (not sure about other regions in the state) and it has been nearly 10 days:


Bond traders betting on Euro break up..

February 22, 2017

Joe of Bloomberg points to this interesting article. The article shows how investors anticipating some exits from Euro are buying short term German bonds. Though, the risks are not as large as seen in 2010 period.

However, the sources of concerns are different. He adds that this time the risks are from political troubles and Draghi’s 3 magic words “whatever it takes” will not help:

Once again, traders are placing bets on a breakup of the euro area. Investors are piling into short-dated German government bonds, which would presumably be the safest of safe havens if calamity were to strike.

But is the euro really at risk of a breakup? You’d think, perhaps, that if the currency survived 2010-2012 then it can survive pretty much anything. And obviously at this point (at least going by peripheral spreads) investors aren’t anywhere near as concerned as they were back then.

But one thing to consider is that the problems faced back then by Europe were essentially about monetary architecture. Governments lacked a fiscal union and a central-bank backstop, exposing them to the whims of bond vigilantes. Mario Draghi solved the problem in 2012 with his “whatever it takes” speech.

This time, the stresses building in Europe are perceived as more political. Anti-euro factions are on the rise while mainstream center-right and center-left parties are seeing their support melt away. As risk transfers from the monetary realm to a political one, these problems won’t go away with three simple words from a central banker.


Evolution of currency denominations in India – From Rupee 1 to Rupees 10000

February 21, 2017

I came across this wonderful book – The Indian Financial System (1985) by RK Sheshadri, former Deputy Gvernor of RBI (1973-76). It is perhaps one of the most useful books to understand how Indian monetary and fiscal system has evolved over a period. It has amazing amount of information and facts which helps one know many aspects of Indian macroeconomic system and not just financial system.

From the book and other data available with RBI, I tried to draw a timeline of the various currency denominations in India. I have also updated it as his analysis ends in 1985.

This is how the timeline looks:

  • 1861       Paper Currency Act allowed denominations of Rs 10, Rs 20, Rs 50, Rs 100, Rs 500 and Rs 1000.
  • 1871       Allowed Rs 5 and Rs 10,000 which were issued in 1872.
  • 1910       Rs 20 discontinued as not much in demand. Reintroduced in 1972.
  • 1917       Re 1 introduced due to shortage of silver; discontinued in 1926.
  • 1918       Rs 2.5 issued for the same reason; discontinued in 1926.
  • 1935       Issue of Rs 50 discontinued due to lack of demand, reintroduced on 17-May- 1975.
  • 1940       Re 1 reintroduced.
  • 1943       Rs 2 introduced.
  • 1946       Demonetisation of Rs 500 and upwards.
  • 1954       Reintroduction of Rs 1000 and 10000 along with a new Rs 5000 denomination.
  • 1978       Demonetisation of Rs 1000 and upwards.
  • 1987       Reintroduction of Rs 500.
  • 2000       Reintroduction of Rs 1000.
  • 2016       Demonetisation of old series of Rs 500 and Rs 1000. Reintroduction of new Rs 500 and a new denomination Rs 2000.

Interesting to note that we had Rs 2.5 albeit for a short time as well.

Of all the denominations, Re 1 is the most interesting. It was first planned to introduce the note in 1893 but did not happen. It was finally issued in 1917 due to shortge of silver. As silver prices declined in 1920, these notes withdrawn in 1926. The notes were again printed in 1933 (in England) as silver prices rose dur to Silver Purchase Act 1934. However, the crisis receded and notes were not issued.

Though they were issued on 1940 due to again – shortage of silver. The issuance was done under the Currency Ordinance (1940). AS the ordinance was made during World War II, India and Burma Emergency Provisions Act 1940 amended the the 9th schedule of Government of India Act (1935). This allowed continuance of all the ordinances issued during World War II. Thus, it continues to provide the authority to Government to issue Re 1 note.

So much so, the Government stopped printing Re 1 notes a while ago, the ordinance remained much to surprise for lawmakers:

Remember the Re1 note, or the last time you saw it?

It may well have gone out of print, but an ordinance promulgated to facilitate its birth in 1940 is still in force, despite the fact that the Constitution grants no more than six months of life to an ordinance.

Notably, the currency ordinance issued by the colonial British government to print the Re1 note is going to survive, as it did two bids earlier when a finance ministry panel in 1997 and then the law commission in 1998 recommended its repeal on the ground that the note is no longer printed.

The parliamentary standing committee on finance stumbled upon the currency ordinance, 1940, recently while examining the coinage bill, 2009, aimed at replacing four existing laws on metal coins and tokens.

Flummoxed by its queer longevity, the committee headed by former finance minister Yashwant Sinha asked the ministry if the ordinance promulgated in 1940 was ever enacted as a law.

“No. The currency ordinance, 1940, was promulgated after passing of the India and Burma (Emergency provisions) Act, 1940, which provided that ordinances made during the period of the Emergency beginning June 27, 1940, (imposed to meet the exigencies of World War II) would not lapse within six months,” the ministry told the lawmakers’ panel.

“This made the currency ordinance, 1940 of permanent nature,” it said, adding that after Independence, the Indian government adopted it thorough a presidential order in 1950 to adopt various British laws.

An ordinance is a special piece of legislation made by the executive to meet an emergency when Parliament is not in session. But Article 123 of the Constitution stipulates that the ordinance will lapse unless it is ratified and made into a full-fledged law by Parliament within six months of its promulgation.

Asked by the panel as to why the ministry was not repealing it when it has stopped printing Re1 note, the ministry replied: “The 1940 ordinance may not be repealed as yet as one rupee notes continue to be in circulation though not being printed any more.”

The coinage bill, 2009, seeks to amalgamate four laws — Metal Tokens Act, 1889, Coinage Act, 1906, Bronze Coin (Legal Tender) Act, 1918, and the Small Coins (Offences) Act, 1971, into one comprehensive act.

So Coinage Act 2011 Section 28 says:

28. Continuance of existing coins

Notwithstanding the repeal of the enactments and the Ordinance specified in sub-section (1) of section 27,–

(a) all coins issued under the said enactments; and

(b) Government of India one rupee note issued under the Currency Ordinance, 1940 (Ord. IV of 1940), which are legal tender immediately before the commencement of the Coinage Act, 2011 shall be deemed to be the coin and continue to be legal tender in payment or on account under the corresponding provisions of this Act.

All this is so so fascinating.

History, law, currency, wars…there is a bit of everything in this. It is a pity we have not paid any attention to currency denominations in studying monetary economics. With the war on cash, much of this will be lost as well.

Seychelles demonetises its currency but there is enough time…

February 20, 2017

India has clearly set tall standards with its demonetisation exercise. The sheer volume of the exercise will always be tempting for governments worldwide.

Now Seychelles has decided to demonetise its notes. But the reason is very different. They has introduced new security notes earlier and just wanted to draw the older notes. Even times for withdrawal older notes is not three days as done by Indian government but the timeline is till 30 June 2017. Post 30 June 2017, the notes can only be exchanged with central bank (which hopefully will not go back on its promise):