My Experience with the Rs 2,000 Note

In this issue:

» Note Ban Impact on Currency

» Markets in the week gone by

» ...and more!

Location: Nariman Point, Mumbai

Bank: Syndicate Bank

Time: 3:30 pm

Time in Queue: Approximately 15 minutes

You must be thinking I am very lucky to be in the queue for only 15 minutes. Well, this particular ATM only dispenses Rs 2,000 notes. I wanted to have at least some money in the wallet.

The challenge for anyone with a Rs 2,000 note is to get change. It is a nightmare. Go the market for groceries and you have to spend at least Rs 800.

But I had an idea.

What if I went to a restaurant and ordered food worth Rs 200-300? When it was time to pay, the restaurateur would have to accept my Rs 2,000 note. I wouldn't carry my debit or credit card. I thought that unlike grocery stores, the restaurateur wouldn't refuse the Rs 2,000 note.

So that's what I did. I went to a restaurant. The check was around Rs 250. Straight away, I produced my new Rs 2,000 note. But I was in for a surprise.

The restaurant manager called me to his counter and said: 'Brother, I don't have change. Pay me this money some other day.' I tried the same experiment at other restaurants near my office.

Same result.

What's the value of this Rs 2,000 note if it cannot buy what I want? Many vendors, taxiwalas, kirana shops do not have a card machine. Most don't have Paytm or freecharge.

I observed about a dozen banks near my office and handful near my home. Three points emerged:

• Most ATMs do not have any cash at all.
• Those which do, have only Rs 2,000 notes.
• The situation gets worse on banks holidays.

Honestly, I was thrilled when the prime minister made this big announcement. I thought 30-40% of the money would not come into the system. Given the short 50-day deadline, I really believed the government had a long-term, systematic plan in place.

A simple case of short-term pain for long-term gain, I thought.

My assumptions were very far from the ground realities. In the early days of demonetisation, people did have some spare Rs 100, Rs 50, and smaller denomination notes. But now, with few spare notes going around, the pain is far worse than I thought it would be.

At one end, there is a real shortage of smaller denomination notes. And at the other end, we have the Rs 2,000 note, which is of literally no use.

To understand the demonetisation process, it helps to read Vivek Kaul:

• It is worth remembering here that the capacity of the printing presses supplying RBI with notes is around 300 crore notes per month. This, when the presses work 24 hours a day and for the full month.
  
  The total number of 500 rupee notes demonetised stand at 1,716.5 crore. At 300 crore notes a month, it will easily take five to six months to replace the total lot. Even if all the notes are not printed, given the push towards cashless, it will be a while before there is enough cash going around in the economy.
  
  Nevertheless, for a country where 98 per cent of the consumer transactions happen in cash, cash remains the major form of money. How difficult it is to understand this basic fact?

Logical, right?

This explains everyone's troubles with the Rs 2,000 note.

But there's much more to the demonetisation story. It's clear that the problems caused by demonetisation will last for much longer than initially thought. It also looks like the Rs 2,000 note has done more harm than good...

For all those who want to truly understand demonetisation, Vivek wrote an insightful report, Demonetisation: The Good, Bad and Ugly. I believe it is required reading.

12:45 Chart of the Day

The most direct impact of demonetisation has been the crash in the amount of money going around. The economic terms it is called 'currency in circulation'. As today's chart shows, it is down about 60% in the last month.

As per an article on Livemint, after factoring in deposits, withdrawals, and exchange of cash, between 9 November and 7 December, the amount of cash in public hands for carrying out transactions has fallen 60%. This is a direct result of the withdrawal of the Rs 500 and Rs 1,000 notes. These motes formed 86% of currency in circulation pre-08 November.

Note Ban Impact on Currency

As we are all painfully aware, this massive stock of money hasn't been re-monetised yet. The printing (i.e. supply) of the new Rs 2,000 and Rs 500 notes has not kept pace with demand. While the currency in circulation dropped by Rs14 trillion, the Reserve Bank of India had replenished only Rs 4 trillion.

As Vivek Kaul explained in The Dairy,

• It is worth remembering here that the capacity of the printing presses supplying RBI with notes is around 300 crore notes per month. This, when the presses work 24 hours a day and for the full month.
  
  The total number of 500 rupee notes demonetised stand at 1,716.5 crore. At 300 crore notes a month, it will easily take five to six months to replace the total lot. Even if all the notes are not printed, given the push towards cashless, it will be a while before there is enough cash going around in the economy.
  
  Hence, the point is that people are not hoarding cash. There simply isn't enough cash going around.

We believe, to resolve this mess, another 5 to 6 months will be needed. Economic activity will remain under pressure until then.

After a 0.25% rate hike by the US Fed, global markets ended on a mixed note in the week gone by. While markets in the developed economies ended strong, the indices in the emerging economies fell on concerns of foreign investors pulling out money from these markets post the rate hike.

In its monetary policy, the US Federal Reserve raised interest rates by 25 basis points to 0.75% This the first hike since December 2015 and only the second one in the decade. The Federal Open Market Committee (FOMC) cited an improving economy and a strong outlook for the labour market as reasons for the hike. Going ahead, the US Federal Reserve has indicated a hawkish stance with respect to hike in interest rates. The FOMC, in an effort to progress towards its inflation goal, has projected three rate increases in 2017, putting the rate at 1.4% by the end of the year. It would then rise to 2.1% by the close of 2018.  The Fed's aggressive tone sent the US dollar to 13-year highs. While the US market was up 0.4%, Japan was the biggest gainer, up by 2%, as a weak yen against the rising dollar makes the country's exports more competitive. Germany and France were the other gainers registering gains of over 1% for the past week.

Among the emerging economies, Brazil, China and Hong Kong were the biggest losers after the US Fed flagged a faster pace of interest rate increases than expected in 2017. Each of the markets registered a downfall of more than 3% last week.

Back home in India, market indices also bore the brunt of the rate hike as the ongoing demonetisation drive continues to weigh on demand and financial performance of companies. The index was down by 1% in the week gone by.

On the sectoral indices front, barring IT stocks, all the major indices closed on a negative note. Metal (down 4.4%) and Telecom (down 3.7%) were the biggest losers for the week.

Performance During the Week Ended 16^th December, 2016

04:30 Investment mantra of the day

"It's far better to buy a wonderful company at a fair price than a fair company at a wonderful price." - Warren Buffett