Blowing hot air & fanning a controversy: The R.B.I.

The Bullish Bear is back to tell the tale of the Indian central bank a year into the arguably illegal sanctioned demonetization program of the Narendra Modi-led BJP government. Fiscal 2016-17 proved to be a watershed year for the R.B.I., which at a stroke shed its image as a holier-than-thou technocratic governance-based institution (Blocking The Economist and BBC from its pressers) and exposed its vulnerability to a sordid moneyed-political campaign of a bullying government (Reforms of an overzealous Modi) through, at the very least, its poor set of financial disclosures, which will be our focus here in this article.

Part 1: The checksum failure discovery

Back in December 2016, the Bullish Bear had discovered a loophole in the disclosures of R.B.I.’s currency management, which is akin to inventory management of a paper manufacturing (banknote printing) firm. Here’s the problem depicted in figures in the tables below:


In a nutshell, a basic checksum on outstanding currency fails – the number of banknotes supplied and disposed off by the central bank can’t account for the net change in the number of the banknotes. To illustrate: on March 31, 2016, instead of the published 90.266 billion banknotes in total, only 88.406 billion could be accounted for by checksum – a difference of 1860 million banknotes or Rs. 977 bn! (We exclude the latest fiscal FY 2016-17 due to the unusual event of demonetization). On March 31, 2015, instead of the published 83.579 billion banknotes in total, a larger figure, 85.845 billion, could be arrived upon by checksum calculation – a difference of 2.27 billion banknotes or Rs. 119 bn. And the internals would make one’s head spin.  On March 31, 2016, published volumes of the Rs. 100, Rs. 500 and Rs. 1,000 banknotes exceeded calculations by 1.011 billion, 1.088 billion and 362 million, respectively! On March 31, 2015, published volumes of the Rs. 100, Rs. 500 and Rs. 1,000 banknotes exceeded calculations by -30 million, -448 million and 142 million, respectively. Of course, the problem stretches back to prior years as well.

It has to be noted that the problem isn’t that there is merely a checksum failure. After all, there is such a thing as currency in transit – banknotes in limbo – as they make their way from the printing presses to the currency chests. It is the swing in this figure that really matters. And even that is not evidence, in and of itself, of incompetence at the highest levels in the R.B.I. (a) It is the non-disclosure of the significant swings which leads me to believe that something is amiss about these banknotes in transit, which need to be tracked & accounted for fully in real-time, and (b) The way the formula in the table above has been applied, a positive figure indicates oversupply (Akin to ATM unloading) and a negative figure indicates undersupply (Akin to ATMs withholding cash). While either action is entirely permissible in R.B.I.’s currency supply operations (More in the following section), it is the large swings from undersupply to oversupply & vice-versa that don’t square up & need explanation. For instance, in FY 2012-13, the checksum on Rs. 500 transitioned from+2.40 billion to +186 million, a swing in volume to an oversupply of 2.21 billion. But this constitutes as much as 21.6% of the volume of Rs. 500 banknotes at the beginning of FY2012-13. Simply inexplicable that the currency chests can hold & unload over 1/5th of all of the Rs. 500 banknotes in the country in just one year! Also equally discombobulating is the swing in value terms (Right most column). For instance, in FY 2015-16, ID+CC unloaded Rs. 1.10 trillion of cash in to the public circulation!

Part 2: The R.B.I. calls up the Bullish Bear

On the afternoon of Friday, 22nd Sep, 2017, the Bullish Bear received a call from an official from the R.B.I. (Name & designation withheld), who wished to clarify the discrepancy. He was fairly straightforward about it, saying that the discrepancy is merely the cash withheld in the ID (Issue Department) and the CC (Currency chests). To me, this was merely technical arrangement, and I said as much.

I proceeded to explain my calculations and also gave an additional insight: Around 2013-14, analysts and econometrists were complaining about a perceptible increase in money supply leading to an uptick in inflation. However, at the R.B.I.’s end, at the end of 2013-14, a situation akin to ATM withholding (i.e. ID and CC unable to supply to the public) of banknotes flourishing (2.92 billion deficit in volume from a surplus position of 3.90 billion) coincided with the introduction of the Lead Bank scheme of currency distribution by the R.B.I. (More on this in the following section), which could explain the situation partly.

Similarly, that the Lead Bank scheme was discontinued in FY 2015-16 may explain, at least directionally, the reason that the volume of total banknotes ran into an ATM unloading situation at the end of FY 2015-16 by 4.13 billion notes (4.94% of all banknotes outstanding at the beginning of FY 2015-16) in volume or Rs. 1.10 trillion in value! But there is no tangible data to back up this large swing in banknotes.

I politely conveyed to the official that the institution has to explain the figures and demonstrate with figures that the cash position within the issue department and currency chests account for discrepancy fully. In common parlance, dot one’s I’s and cross one’s T’s. Otherwise we have a square peg in a round hole! The official was courteous, and I thanked him for his call too.

Part 3: Is the non-disclosure of ID+CC data due to the fact that the R.B.I. is technologically challenged?

Looking into the past disclosures, the R.B.I. has not been shy of experimenting with its currency distribution system. This may help explain the wild swings, though only partly. Nonetheless, I do want to point this out as something that has been accounted for while making the headline claims & continuing on the stated big picture theme in this article. Per the R.B.I.’s FY2014-15 annual report, p. 108-109:

“The Lead Bank Scheme for currency management was introduced on a pilot basis in 2013 by identifying one district of each state and assigning the same to a lead bank, which, in turn, is responsible for ensuring that genuine needs of members of the public for clean notes and coins are met through coordination with currency chests and small coin depots situated in that area. The lead bank as a nodal bank for currency management (BCM) attends to issues, such as linkage of non currency chest branches to currency chests, facilitation of supply and issue of banknotes and coins to and from bank branches in the area, prompt routing of diversion requests and redress of public grievances. The nodal BCM undertakes functions relating to spreading awareness/ literacy campaigns on security features of genuine notes and exchange of mutilated notes. After a year of operation, the scheme was reviewed and it was decided to continue it in 2014-15; it is under review for 2015-16.”

The R.B.I.’s FY 2015-16 annual report (p. 90) confirmed that in order to strengthen the distribution of currency by “leveraging technology,” the banknote distribution system was changed to a hub-and-spoke model with mega currency chests (MCCs). Did you read that… “Leveraging technology” at the CCs?

At this point, may I draw the reader’s attention to just show two instance proving that the R.B.I. has been deficient in technology all throughout: (1) Government-owned Security Printing and Minting Corporation of India Ltd (SPMCIL), which supplies ~40% of R.B.I.’s banknotes, admitted in its FY 2014-15 annual report (p. 38) that it first deployed an ERP system (Enterprise Resource Planning) in as late as FY 2014-15! Also that it has “Old machinery & inefficient layouts at some units” on p. 49 of the same report, (2) And in the latest FY 2016-17 annual report itself, on p. 129, the R.B.I. used a “sample” of just 25% of Currency Chests to determine the total number of fake Indian currency notes.

Just to clarify the hypocrisy, at this moment the Indian government and its central bank have been pushing all kinds of demands on the public in the name of digitization and simplification such as the GST, Aadhar, and demonetization. Yet the country’s most respected public organization, the central bank itself, has been dragging its feet on technology & can’t even count properly the banknotes it prints up!


To sum up, it is not just that the swing in the discrepancy ID+CC bucket was large. That it remains undisclosed in the first place and was likely poorly tracked historically – is the nub of the issue

There is plausibly little reason for non-disclosure. Data related to financials of the issue department (ID) (R.B.I.’s accounts for FY 2016-17) is public information and so is the data related to the physical location of the currency chests (CC). And if there are any insecurities about mass looting if the public gets to know how much money there is in which currency chests & that is the reason for non disclosure, it begs the question: how come the banks are so secure with known large deposits of cash at call at all times??

3 Reasons Why Urjit Patel Is a Dove Trapped in Hawk’s Clothing

The Bullish Bear is back with a few delectable insights into yesterday’s rate cut by the Reserve Bank of India, a relatively unexpected one, albeit a sixth cut in just under 2 years. A basic survey of newspapers after yesterday’s events will reveal that many analysts seem convinced that Government has now sidelined its CPI target in coming years of 4%. Two quick deductions: (1) Interest rates are decidedly headed in one direction only: and that’s down. For now. And (2) Monetary Policy Committee (MPC) or not, Urjit Patel is there to command the ship as per the directions of the BJP-led government. I present my case here in support of such a growing belief that Urjit Patel is a dove trapped in hawk’s clothing under the previous governor’s regime.

#1 Recent data releases were mixed and technically, did not merit a reaction

Consumer sentiment was robust and ahead of forecasts (A: 113, F: 110, P: 112), likewise the August PMI manufacturing forecasts (A: 54.7, F: 52.3, P: 51.9). July’s industrial production index (IIP) missed wildly (A: -2.4%, F: 4.0%, P: 2.0%), though these are known to be volatile, but August’s inflation (A: 5.1%, F: 5.8%, P: 6.1%) and current account deficit in Q2 remained under control (A: -$0.3 B, F: $0.4 B, P: -$0.3 B). [All statistics sourced from]


A cut in interest rates seems to be the obvious course of action from the statistic of Bank Credit growth FYTD of 0.8% significantly lagging Bank Deposits growth of 5.0%. However, sound economics will deduce, infact, a necessity to raise interest rates based on this data point! More money growth in the system is a warning sign of excess money creation, and a cut in interest rates will only add fuel to the fire. In any case, even if we were to analyze the conventional view of cutting interest rates, rate hike transmission was the key intermediate step to resolve: Over the last 150 bp of rate cuts, only 70bp have been passed on.


Comparing India’s positioning to BRICS nations, for the large part, India has favorable growth statistic (9th highest in the world), but is at risk from rising prices. Upside risks to CPI include (1) rising crude prices, (2) upcoming strong quarter for Gold, which may strain deficits & the Rupee and (3) government largess in wages and compensation fueling consumption demand. And although RBI’s release cited moderating food prices as a relief, it should be noted that the food price inflation index is first of all, volatile, and second of all, at a level of 8.23% in July, still very high!


#2 Ex-ante polls were markedly more dovish under the new governor

Since Urjit Patel’s appointment as governor on August 20th, analyst polls on rate cut swung significantly to a more dovish stance (From under 12% expecting a rate cut in deposed governor Raghuram Rajan’s last meeting on August 9th to over 40% ahead of October 4th meeting chaired for the first time by Mr Patel). Reuters on 30th September stated that “Several analysts in the poll said they expect him and the newly-formed Reserve Bank of India Monetary Policy Committee to follow a more dovish path than his predecessor.” If analysts are to be considered “informed,” then this large movement in the informed consensus on what’s coming held valuable information for the market.


#3 Urjit Patel was installed by a government crying out for lower interest rates

Numerous instances have been reported documenting politicians criticizing Raghuram Rajan’s monetary policies. Dovish Government stalwarts such as Rajya Sabha MP Subramianian Swamy openly backed the instalment of Urjit Patel, who thought it was “idiotic” to believe that Patel will be as hawkish as deposed RBI Governor Raghuram Rajan. Mr Patel may have some wrongful history as well: it was reported that Patel was involved at the highest levels with scamster Jignesh Shah, according to a report by India Samvad.

And lest we forget the basics of how the central bank operates in India. Per the Reserve Bank of India Act, 1934 (Updated January, 2013): (1) Its governors are appointed or nominated by the central government, (2) the Government of India also dictates the appointment/ nomination of all directors to RBI’s board of directors, (3) the RBI was nationalized on 1 January, 1949, and is fully owned by the Government of India.

And best of all: the RBI does not even get audited!

Independence.. what independence?!