S&P: Demonetization casts shadow over RBI’s competence

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.
The comments come as the Reserve Bank of India and the government face criticism for their implementation of the demonetization initiative in November, abolishing 500 and 1,000 rupee notes ($7.41-$14.82), 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.
Curry, in a teleconference with media, said demonetization had undermined confidence in the predictability and effectiveness of policymaking in India, including of the RBI.
“Demonetization has cast a shadow over the RBI’s competence and independence,” 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 Gov. Urjit Patel has also been criticized 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.
In a related development, BMI Research, a group company of the Fitch rating agency, said that India’s scrapping of high-value bank notes has dragged down economic growth in neighboring Nepal with trade, remittances and tourist numbers all down.
BMI has revised down its forecast for land-locked Nepal’s economy, saying that India’s demonetization could shave Nepal’s growth down to 2.2 percent for this fiscal year to July 2017, from an earlier estimate of 2.5 percent.
Nepal’s $21 billion economy was already suffering with growth at less than 0.8 percent in the 2015-16 fiscal year after earthquakes in 2015 that killed about 9,000 people.
“The disruption in funds from India is likely to weigh on ongoing reconstruction efforts,” the research agency said in a report, adding that Nepal’s economy was heavily reliant on India for trade, jobs and aid.
The announcement by Prime Minister Narendra Modi on Nov. 8 to ban 500- and 1,000-rupee notes was intended to flush out billions of dollars in unaccounted wealth and hit the finances of militants suspected of using fake currency.
The Nepal Rastra Bank, the central bank, has now banned Indian currency, saying it wanted a formal communication from the Indian central bank about new Indian bank notes being brought into circulation.
“Until such a notice is received, we will not accept the new Indian notes,” said central bank official Rajendra Pandit.
That leaves thousands of Nepalis doing informal trade along the open border with India without the means to receive or make payments for their business.
Nepali Prime Minister Pushpa Kamal Dahal, a former Maoist rebel commander, spoke to Modi after the currency ban to ask for arrangements for the exchange of the now defunct Indian cash held in Nepal, but that has yet to happen.
The inflow of Indian tourists to Nepal, who account for a quarter of about 800,000 visitors a year, has fallen. Many Indian tourists have traditionally carried Indian currency for payments in Nepal.
In addition, Nepal depends heavily on funds from workers in India, who sent home $640 million in 2016, or about 2.6 percent of Nepal’s gross domestic product.
Thousands of Nepali migrants are returning home as Indian businesses cut production following the cash crunch.

Source: Arab News