Confidence in RBI hurt: S&P

Mumbai: India’s surprise move to abolish high-value rupee notes has undermined the central bank’s reputation for competence and independence, even as it remains a credible institution, Standard & Poor’s director Kyran Curry said on Wednesday.

The comments come as the RBI and the government face criticism for their implementation of the demonetisation initative in November, abolishing Rs 500 and Rs 1,000 notes, which accounted for 86 percent of the currency in circulation.

The slow replacement of the abolished bills has sparked a shortage of cash that has hit large parts of the economy, and the RBI and government have had to subsequently announce a series of ad hoc measures to ease the impact of the measure.

At the same time some policy makers, including former Prime Minister Manmohan Singh, now part of the opposition, has also questioned the RBI’s independence for agreeing to implement the action without much preparation.
Mr Curry, in a teleconference with media, said demonetisation had undermined confidence in the predictability and effectiveness of policymaking in India, including of the RBI.

“Demonetisation has cast a shadow over the RBI’s competence and independence,” Mr Curry said. However, he also noted that “we still think this institution is a very credible one, and in terms of the conduct of monetary policy, it’s a very mature institution.”

The RBI under governor Urjit Patel has also been criticised recently after surprising investors by keeping interest rates on hold last week, the second time in a row it has wrong-footed investors with its monetary policy decision.

Meanwhile, direct investments by Indian firms abroad plunged by 70.9 per cent year-on-year to $747.78 million in November 2016.

Meanwhile, British brokerage HSBC has opined that the negative wealth shock may not be too high as originally feared. While effective currency in circulation has fallen 60 per cent since demonetisation, showing a significant cash crunch, on the other hand 80 per cent of outstanding cancelled notes have made their way back to banks already, suggesting that the negative wealth shock may not be too high, HSBC India chief economist Pranjul Bhandari said in a note on Wednesday.