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Categorized | Currencies

What will it take to quench India’s cash drought?

Posted on November 25, 2016

Here’s an educated guess at the liquidity needed to get India’s cash economy flowing again from Credit Suisse’s excellent Ashish Gupta — with our emphasis:

To get back to normal transaction volumes we estimate 10-12bn pieces of the new Rs500 may be needed. Industry estimates indicate that until last week ~400mn of the Rs500 notes were printed. While total printing capacity is estimated at ~100mn notes per day, the printing capacity of Rs500 notes appears constrained at 40-50mn per day.

… industry estimates indicate that the RBI has already been able to print 1.5bn (Rs3 tn worth of currency). However, these notes being high value and with remaining currency <15% of the total currency, they are unable to provide enough liquidity to transact.

His update comes more than two weeks after India’s prime minister decided — overnight and basically in secret — to take some 86 per cent of his country’s currency out of circulation in an effort to hit those holding illicit wealth in cash.

The experiment hasn’t gone smoothly by any measure. And there is the question of whether it has been worth the pain, considering most black money is not kept in cash and this move doesn’t address the creation of black money.

For now it appears much of India remains solidly in support of the move. Upcoming elections in Uttar Pradesh should provide more concrete data, since surveys de facto struggle to be representative in India and a campaign against black money was a major election promise by Modi. Anecdotally, Mumbai’s middle class remains supportive but those lower down the income ladder are getting angry. We’ve already weighed in on all of that and the long term effects of this, so do click here if you haven’t already read and need catch up..

Back to the matter at hand…

For what it’s worth — and with the usual caveat that this is from our perch in the heart of posh Mumbai and whatever we experience is going to pale in comparison to the troubles in rural India — we definitely agree that it’s the Rs500 note which is needed in wide circulation.

While you can get change for a Rs2000 note, it’s not a certainty and rarely without a struggle. So it’s not great news that so far there are only some Rs200bn worth of Rs500 notes out there when maybe thirty times that amount is needed, per Gupta’s estimate.

Any lack of Rs500 notes is very obviously going to cascade down into a hoarding of Rs100 notes — they are currently the main transactional vehicle in Indian for those who use cash. Alternate solutions have, of course, been cropping up — credit notes, barter, discounted use of the old notes etc. — but they are no long-term substitute for the real thing.

And getting more notes into circulation, as already noted, isn’t going to be easy. There are just some practical barriers in place which are very difficult to overcome. From Gupta again:

The country has only four printing presses with an annual capacity 24 bn notes (on a two-shift basis). On a three–shift basis this can be ratcheted up to 36bn notes annually or about 100mn pieces a day. However, this capacity is across denominations and not entirely fungible. Given the differences in the paper used and security features some of the smaller denomination capacity cannot be used to print the higher denominations. Given the run-rate in the past week, it appears RBI has been able to print only 40-50mn pieces/day of the new 500. In the full year of FY16, RBI had printed 5bn pieces of Rs500 and 2bn pieces of Rs1000.

It may take months to get adequate 100s & 500s: Assuming a 3x jump in share of non-cash transactions to 20% of total consumer spending, a money velocity (turnover) of 6x, required currency in circulation is around Rs10 tn. Assuming, 20% of this is met through low denominations, another 20% from 2,000, the residual Rs6 tn will need Rs12 bn of 500s or say 10bn of 500s and 20bn of 100s. An option RBI therefore must be exploring is to get some currency printed offshore.

Here’s a CLSA estimate which says roughly the same thing in chart form:

Screen Shot 2016-11-25 at 11.51.41

There are slightly different estimates in terms of amount between CS and CLSA, but the end result of both notes is that “the government will need to keep printing at this flat-out pace (3 shifts) until at least 20 March.” Which means from a printing perspective alone the cash crunch will continue for a few more months.

And on top of that, again from Gupta:

In addition to the printing constraints, the RBI would also have logistical constraints. The money is printed in four printing presses in the country, from these presses it is transferred to 19 currency issuing offices of the RBI. From these, the money is transferred to 4,100 currency chests (most located within banks) across the country. From these currency chests, the money has to then be moved to > 130,000 bank branches and > 200,000 ATMs across the country.

As per cash logistics association of India, there are currently only ~8,800 vans and ~40,000 employees in the cash management service. This constraint has also been visible in the inability of the banks to be able to transport the old cash coming into their branches back to the RBI/currency chests and 30-40% of incoming deposits are still with them.

As a logistical game, this has all been great fun and included marvellous details like ATMs which weren’t properly calibrated to take the new notes — at last count “about 40% of cash vending machines in the country” have now “been re-calibrated to dispense new high security currency notes of 500 and 2,000 rupees.”

As something that has profound implications for real people, many of whom are amongst the most vulnerable in Indian society, it has been less amusing.

FT Alphaville, by the way, finally got some Rs500 notes from the cash machine on Thursday – after negotiating a strikingly short queue – and will be doing its duty by sending them out into the wild in exchange for quantities of alcohol later on Friday evening.

Long may they multiply.

Related links:
The curse of Indian cash scrapping – FT Alphaville
Rupee clean-up will do little to purify Indian politics – FT

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