Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

Demonetization and India’s Macroeconomy – Will Rupee Depreciate?
After the recent demonetization in India, an event with significant and deep reverberations across its economy, the Indian economy will eventually bounce back in three phase in 1 – 3 quarters, unless accompanied by additional steps to curb the parallel economy under current economic and political environment. Next 1 -3 quarters will report at least a drop by 0.5 to 1.25 percent point in India’s GDP. Despite the economy contracting, this will be similar to deflation. Economic indicators during these phases will differ. Earliest ever blog on India’s Demonetization and its macroeconomic impact. Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

Demonetization – How will it affect the Indian Macroeconomy?

Obviously, the cash financing the legal, semi legal and illegal activities has vanished. Parallel channels, pumping money on the side have suddenly gone dry. Diminution of revenue will have a domino effect in the short term. Diminution of revenue will have a domino effect in the short term. While sparing essential living activities, this will have effects on every aspect of the economy – building, sales, travel, spending etc.

This decrease will eventually, reflect on the overall economy and its growth projections. A significant proportion of free floating cash financing several essential and non-essential daily operations will be strangulated. Cash earned irrespective of means, is an asset and not having an asset or liquidity will have deep impacts. Bloomberg feels it is contraction. To me, its deflation will follow and contraction. Primarily, contraction will be due large volumes of money being sucked out of the parallel (Juggad) economy with accompanying system wide impact. It will change the barometers of all key indices, Irrespective of sectors.

These phases will last 3-4 quarters, unless complemented by addition steps to curb the parallel economy. Next 3-4 quarters will report at least a drop by 0.5 to 1.25 percent point in GDP, at best, definitely risking it from calling it recession. Does that mean inflation and recession? No, despite the economy contracting, this is not recession though it is more similar to deflation. Economic indicators on each of these phases will reflect a different figure.

Now, does that mean I am against Demonetization? Certainly not! No pregnancy is without pain and no delivery is without cry and smile, except when you induce with Cesarean section under anesthesia. However, we are talking about the birth of a new era, and we are trying to understand how this newborn will impact existing earnings and revenue potential of the country in general (the macroeconomic considerations or implications). I see deflation (not recession) with overall contraction in the economy in the immediate future. Mauro Guillen, Director of the School’s Lauder Institute and a Professor at Wharton commented, “In the short term, the move could stifle some businesses that are legal and clean, if they use cash payments. But everyone will adjust. And while it can hurt some small businesses and individuals, it is better to do it than not.”

Three phases of recovery –

Economy will be impacted on several counts from GDP, Per Capita earning, Consumption, Investment, Industrial Production, Fiscal Balance, Public Debt and Unemployment Rates. However, this recovery will be marked by three distinct phases. Each phase demarcated by particular barometer of the economy.

  • Phase One – Lasting until end December, when the last notes would be officially accepted.
  • Phase Two – Deflationary pressure contracts the economy
  • Phase Three – Drop in Interest rates drop to bump up economy

Phase One – The Cash Crunch Phase:

Also the immediate phase succeeding demonetization, marked by severe depletion of cash or cash crunch. Only essential purchase activities will continue. CPI and CFPI will drop during this phase. The manner in which the denominations were retracted created a perceived rather than real loss. Cash spending reduced significantly so also purchase activities. Of course, loss of purchase activities, specifically based on Cash economy, would definitely result in a drop in GDP. Consumer spending activity fell to a near halt. Consumers are refraining from making any purchases except essential items from the consumer staples, healthcare, and energy segments. However, deflation will not be seen until phase 2.

Phase Two – Deflationary Phase:

Though Bank remittances will be high, the system will still be deprived of cash flow. The system has a tendency to bounce back and people will find ways to mobilize cash to support their cash based, if not illegal transactions. This phase will be marked by  liquidity mobilization will see a fall in prices on big ticket items such as real estate, less spending on luxury items etc. Apart from Real Estate, Gold and jewelry will also see diminution in value by approximately 10-15%.The next phase will have a little rebound to the GDP along with CPI but big ticket purchase will still be low.

During this period, real estate is likely to show significant down trend. Home prices may drop significantly, especially where investors have high stakes without support. Tier 1 cities will be most affected, primarily due to real estate activities being funded by investors. Tier 2 and Tier 3 will follow suite. Some reports say, accounts activity in the real estate sector, which includes a lot of cash and undocumented transactions, has already slowed down significantly, Metropolitan and Tier 1 cities reported up to a 30% fall in house prices. Industrial production will slow down on account of decrease appetite for domestic consumption. Rupee will continue depreciation against Green bag and the downward slide will be supported by Central intervention. However, decrease fiscal deficit and public debt will help Rupee from falling further. Also, imports will be impacted negatively and that will retain the value of Rupee in midterm.

Phase Three – Drop in Interest Rate:

Continued economic slowdown will mandate stimulation and the interest rates would drop, possibly by 0.5 to 0.75 percent. Trade deficit will decrease marginally. GDP will still not be back to the Nov 30, 2016 value. CPI and WPI will bounce back but not to the Oct 2016 values. Big Ticket items will continue to reel under the deflationary pressure.

End Note:

In the next 2-3 quarters, it will depreciate but eventually, after 3-5 quarters, it will be the most appreciating currency across the globe, primarily for its intrinsic strength but also secondary politicoeconomic phenomenon across the globe. By than, Trumpism will show its negative impact on dollar, Pound would not be as strong as it was Pre-Brexit, Euro should be sliding or at the most stabilized itself from sliding. Yen and Yuan both won’t show much potential for appreciating. Despite their strength, Canadian and Australian dollars won’t have to much impact.

Several factors will weigh in in favor of Rupee. As mentioned earlier, Rupee will depreciate in the next 2-3 quarters but start appreciating by early 2018. Turnaround in Rupee valuation vis a vis major currency baskets (appreciation), and slide of dollar, will most likely coincide at the same time, given the current political economic situation. Rupee should start appreciating and will dominate overall currency baskets after 3-5 quarters.

I always trust, when the enterprise, entity or a country stands on sound morals and ethical values, its long term outlook is strong. We definitely are moving in a direction towards that needed change. However, as noted earlier, I also feel this pregnancy and delivery is not without pain, cry and smile.

(Published on Dec 5 2016, this blog is still under construction)

Selected Citations:

Surgical Demonetization? What Is Good And What Needs To Be Fixed?

D SubbaRao – ex RBI Governor’s View on Demonetization ( Full Text )

Demonetization Dos and Don’ts (Gita Gopinath, Prof Economics at Harvard)

Reuters poll – Rupee’s slide from outflows, demonetization likely near end

India Rupee Demonetization: A Government Windfall? (Yahoo Finance)

What are the impacts of Demonetisation on Indian Economy? (Indian Economy; Economy & Finance)


Impact of Demonetization on Macroeconomic factors (Nov 24, 2016)

Demonetization Will Impact Amazon’s Growth In India (Nov 29, 2016)

Demonetization in India: Who Will Pay the Price? (Wharton, Nov 16, 2016)

How Could Demonetization Impact the Indian Economy?

Demonetization of Rs 500 and Rs 1000: The Ultimate Brahmastra on Parallel Economy –

Macroeconomic implications of the Indian Rupee Demonetization?

India: Demonetization and its Discontents

India: Growth picks up in the second quarter of FY 2016

Inflation India 2016

India: Demonetization and its Discontents

Several Interesting Topics to Read on –

Macroeconomics (National Institute of Public Finance Policy)

Macroeconomic Policy (Mapping Finance)

Updated link (below) added on Feb 27, 2017 –

Surgical Demonetization? What Is Good And What Needs To Be Fixed?

I consider demonetization as a key policy that has reverberations with system wide impact and a potential to clean the swamp from decades of moral erosion and political ineptitude. It’s a defining moment of our century and for India, while it was long overdue. I so strongly wish this initiative to win! So, what’s wrong and how to fix the 2016 Demonetization? Those who don’t consider it as a misfired shot, should explain how these 600 million people should manage being cashless or cash strapped until Mid or Last December, 2016. Those who consider this as not a misfired shot, should also explain how this is salvo actually hits those who indulge in black money?

The situation is similar to surgery. I mentioned two fallacies with any surgery and let the readers choose options on how to fix those. By participating in the survey, you will see where you stand amongst those who are vocal on this issue. Polls are open until Dec 4, 2016. Visit after a few days to see how your peers have voted.

What Is Good And What Needs To Be Fixed?

Or, let us ask – What is wrong with Surgery?

Surgery is indicated for an existing abnormality that causes significant functional compromise and it cannot be managed conservatively because of the inherent limitations. The procedure removes acutely offending situation, an example would be an appendix, a tumor or structural abnormality. It does not however remove the root cause that resulted in the outcome mentioned above.

Two pertinent things though – It is done with best interest standards and, the probability of successful outcome is high with anticipation, planning and execution with precision. If a doctor has vested interest in operating an appendix that was never swollen, or if the procedure is accompanied impromptu with inefficient planning and execution, no doubt, the outcome would be compromised or fail to achieve the desired outcome.

Demonetization is a long overdue indicated surgery. No doubt. A system where parallel economy is the norm meant that this was long overdue. It was obvious earlier too but no one dared challenge the system. It was as usual pleasing populist politics. It required a leader, not just with a vision, mandate but also a character, that is so much devoid of our polity. It was hard to find a leader until Narendra Modi undertook that mission.

It’s definitely a radical move, in industry parlance, they call it radical change. That radical change has to be supported by underlying fundamental change in ethos and values. Simply changing overt artifacts is unlikely to change the ground realities. When radical change is implemented without fundamental change, the system has a tendency to bounce back to its original state.

At least two major fallacies with 2016 demonetization

Of the several fallacies with the 2016 demonetization wave, I will focus on the two, which I mentioned in my earlier paragraph.

  1. Logistics and planning were not envisioned, anticipated, planned nor executed
  2. Selected few were aware of the likely change in advance and had already capitalized on the possibility.

Is the media biased?

Every day, we get to hear dreaded news from Modi’s Demonetization, when we talk with folks from India or whether we read a news channel. Generally, outside newspapers don’t have any political stake or bias. Generally, i won’t believe the Indian media, because you get biased news either way, highly positive or highly negative.”, the same holds true with my folks back in India. So, I can take them without that pinch of salt.

Even if I am not reflecting system wide, I can say, it was planned inadequately and executed improperly or else, why do we have to roll back the changes for farmers, college tuition, hospitals, rural areas? If this was anticipated, why is the common man at such a misery? Any radical surgery is associated with post-surgical pain, but the managing doctors have a plan, will never ask you to wreath in pain unattended. It is wrong to say the pain is created by the media, media hype. Don’t we know that the same Modi was so much exalted by the same media?

Why do we care for JFK?

Often Modi supporters point towards his celibacy and character. To be true, celibacy and personal character has nothing to do with political character or political ideology. History is replete with anecdotes of successful kings and emperors having harems with multitude of concubines. What mattered was their feel of the pulse for the masses. These rulers kept the state above themselves. Their personal life was a relaxation and second only to the state or the subjects they ruled. Not long ago, it was revealed that John F Kennedy always had a lady serving him while he was flying abroad as leader of a great nation. We all know, his vision for US and the world order, as well as the value he espoused for the most downtrodden. We all know how decisive he was during the 1962 Cuban war in avoiding third world war. To many, he is credited with putting Man over the Moon.

Why we want Modi to succeed with this initiative?

Personally, I see this as a MUST and long OVERDUE correction for Indian economy, not because of emerging digital phenomenon but to starve or eliminate the parallel economy. A failure of 2016 demonetization will be sad. An astute and courageous politician is likely to face electoral rout in the upcoming state elections, not because of acting for a good cause but for lack of vision, planning and execution.

This is one core deliverable from Modi that is so highly regarded and appreciated. It was eclectic for its system wide impacts of transforming the ethos and economy of India. Yet, it was planned with such belligerence, neglect, logistic flaws and ineptitude of executioner’s vision. This is a lesson learnt while governing a country like India with its complex mesh work of distinct economic layers.

Selected References:

I am in constant search of unbiased opinion. When I try Indian newspapers, they are either biased for Modi or vehemently against Modi. Either of which are inappropriate for understanding the ground realities. By extension, the same happens when I talk with my folks back in India. Thus, I am just disappointed gathering information from Indian Newspapers or those residing in India.

To me, established players from media from advanced countries offer better perspective. Generally, amongst India media, I choose to read Times of India, The Hindu, Financial Times, Economic Times. I prefer to read BBC, Bloomberg etc. for unbiased news about India. Below, is a collection of selected articles.

Demonetization and India’s Macroeconomy – Will Rupee Depreciate?

India: Demonetization and its Discontents

Jets Loaded With Banned Cash Draw India’s Ire in Graft Crackdown

Noted American experts divided over India’s demonetisation drive

The Economist | Free exchange: Paper pains

The Economist | India’s demonetisation: The ropy rupee recall

The Trouble With India’s Demonetization Gamble

IMF says Modi govt’s demonetization move needs to be handled prudently

How Narendra Modi’s demonetisation move brought Raghuram Rajan and Subramanian Swamy together

Did The Government Use Raghuram Rajan’s Exit To Push Through The Demonetisation?

Here’s What Raghuram Rajan Thinks Of Currency Demonetisation

Rural Distress Is On The Rise But Support Grows for Demonetisation: HuffPost-BW-CVoter Survey

Manmohan Singh Gave Major Burns To Modi On Demonetisation Today And Twitter Is Ecstatic

How India’s Cash Chaos Is Shaking Everyone From Families to Banks

India’s Modi Holds to 50-Day Pledge as Cash Chaos Intensifies

India’s Economy Grows Less Than Estimated Before RBI Rate Review

Modi’s Revolutionary Dreams

Noted American experts divided over India’s demonetisation drive

Can India’s currency ban really curb the black economy?

India rupee ban: Currency move is ‘bad economics’

Slew of U-Turns Blight Modi’s Cash Ban, Leaving Indians Outraged

What Will India Do With 23 Billion Worthless Banknotes?




Cataclysmic drift: What’s in for India?

Briefly, India would be preferred over China, India won’t get outsourced jobs as much as it had earlier, India based Global companies such as Tata, Reliance, Tech companies etc. will have to employee local white working and overall, he may possibly reduce Visa and Citizenship quota. We can’t have a war with China or Pakistan and take US support for granted. Coalitions built with Obama on fire.


The implications of Trump’s policies are still not clear but based on his election manifesto and speeches and his victory speech clamp down on immigration, renegotiation of free trade agreements, rebuilding infrastructure

Briefly, India would be preferred over China, India won’t get outsourced jobs as much as it had earlier, India based Global companies such as Tata, Reliance, Tech companies Infosys, Wipro, Cognizant etc. will have to employee local white Americans and overall, he may possibly reduce visa and citizenship quota beyond those reduced by President Obama.

If India goes for a war with Pakistan or China, they can’t take US support for granted. Coalitions built with Obama are very much on fire, if those are not consistent with policy.


  • Coalitions built with Obama Presidency will continue but with a reciprocal basis, only if that benefits US (under Trump regime).
  • You fight your wars, don’t bother us. All that means is, India and US can collaborate in South China but if it is Kashmir, you fight your war with Pakistan, if it is Muslim terrorism, we collaborate.
  • NATO and Other Military Coalitions likely to be downgraded


  • Seismic shift is likely to cause dollar depreciation. Rupee will likely appreciate. FDI in India to increase.
  • Current scenario favors India as one of the top destinations for (FDI ) foreign investment since growth projections are amongst the best and Governance is decisive.
  • Tech Buying Opportunity such as M&A likely to accelerate


  • Immigrant visas likely to reduce along with Citizenship applications.
  • Offshore companies working in US will have to employ locals, specifically hardware and software companies will be impacted
  • Outsourcing will be truncated, oversees jobs that propel US job market will be supported

Note: This blog will keep getting updated on a regular basis as new research trickles in.

Selected reading:

Trump Win May Lead to Tech Buying Opportunity, Mizuho Says

Market turmoil eases as investors weigh Trump’s plan for economy

Q&A: What does Donald Trump’s Presidential victory mean for the economy?

The Economist – World politics: Foreign policy – World-shaking

(This page is under construction. The blog herein is authors personal opinion, for any and all transactions, you are recommended to seek a financial adviser.)

US and World Economy

So once again, US and World Economy is under dark clouds. This time, it’s not US per se, the engine of World economy, but multiple intermediate blocks that have a high potential for creating serious dips along the global supply chain for the coalescing one village economy.

Chinese economy is down for multiple reasons (read McKinsey’s glaring report in their recent article), Multicomponent European Union, BRICS, Asia Pacific-Oceania and NAFTA all have discouraging, if not overtly negative news.

In EU, major players Germany, UK and France are-already reeling under serious GDP decline, while others are sagging the Euro down for some time now. Oceania, with reference to Japan, NZ and some extent Australia are not showing impressive trend lines and amongst the BRICS, Brazil and Russia, (China is already mentioned) are significantly impacted, just with a glimmer of hope from South America and a shining armor from India.

A strong and resurgent dollar is no good for US, as it helps to magnify the increasing trade deficit gap with trading partners. There are several signs of US economy having bounced back, but there is a lurking fear of deep seated impact of constitutive easing. A solid indicator is job market and the unemployment is significantly low, as close to pre-recession and the housing index (new and old) are both strongly supportive along with several other zig saw pieces that support the current economic buoyancy. Foremost amongst that is the Obama strategy with a realization that the emerging world order has multiple players and a self-committed urge to stay away from large scale confrontation and military expeditions. That’s a trillion dollar saver!

Yes, war’s boost economy but they consume current, life and create hatred plus reactionary self-assertion.  Finally, policy executioners might have realized the cost benefit ration and the folly of using war for promoting economy.

How far will it help US and Global Economy? Well, unlike the 2008-2012 major recession where the Engine stalled because of subprime and other defaults, this time around the train may be stopped by  the intermediate compartments.

(the above was written on Feb 27, 2016 and uploaded in Oct 2016).