Demonetization Facts

As promised to my friends, relatives, colleagues, etc, I am putting my views on recent demonetization which happened in India. I am not against or for it, but I would like to share some facts. I am going to put up some graphs below which will show some facts. Although, I have tried to explain the graphs but the intention behind the explanations are facts and not non-neutrality.

We can see from the above graph that the currency circulation started falling from the second week of November. The currency in circulation is still low. The fall in November and beginning of December may be due to demonetization but in the second half of December may be due to the push of the Government of India for digital economy.

As the public started depositing their cash, the banks' deposit with RBI increased. Why will the deposits fall after 2nd Dec.? I think as RBI increased its supply of currency the deposits started falling.

This is a very interesting graph. I may be wrong in interpreting it, but it looks like RBI claims on government reduced since 2nd December. Does this mean that there has been an adjustment, which many have been talking about, in the balance sheet of RBI? Does the government now owes less to RBI? If it is so, as shown in the graph, then this is a big thing. Most conspicuous is the silence of the media on this matter.

This graph may seem a repetition of the Bankers' Deposit graph. As demonetization began the banks got increased capitalization and RBI's claims on banks reduced. But as RBI started increasing the supply of currency, RBI's claim over banks started increasing.

Even after demonetization, the currency liability of the government towards public kept on increasing.

All the graphs above are related to the banking system but the graphs below are not directly connected to the banking system, although the effect of demonetization can be seen on them too.

The turnover of government dated securities seems to have risen after the announcement of demonetization. Its logical as the excess capital will be invested by the public. But the downfall since 25th November is difficult to understand. It may happen due to two reasons: either the public which had excess capital (or may be unaccounted money) invested in government securities and then dis-invested from them, so as to  convert the unaccounted money to legal capital, or either the excess cash coming into the banks was invested by them and then subsequently sold off when there was need for capital. 

The above graph shows another probable outcome of demonetization. After the first week of November, the foreign currency assets have continuously reduced. This may be due to the dis-investment (or selling off) by foreign investors.

After the first week of November there is clear indication of fall in the price of stocks. The sensex did try to make up but is still failing to reach the 27k mark. The intention behind demonetization was applauded and if similar, systematic and well planned measures are taken then it may ensure long term benefits for the Indian corporate world.

When demonetization was announced there were reports of huge increase in the demand of gold. But if we see the above graph then it speaks a different story. It shows continuous fall in the price of gold till 26th December and then a rise in it.

RBI reported that about 90% of the value of scrapped notes were back in the system by 2nd week of December. If this amount would have been less then the government and the public would have gained from it. The IIP, CPI and GDP figures are still not out for the time period. Once they are out we can know the intensity of the impact and the other side of the story.