Andy Mukherjee is a Bloomberg Gadfly columnist covering industrial companies and financial services. He previously was a columnist for Reuters Breakingviews. He has also worked for the Straits Times, ET NOW and Bloomberg News.

India's economy has long been characterized as an elephant, a metaphor that got a whole new meaning on Wednesday when six blindfolded doctors were given the unenviable job of feeling up and, if possible, curing the comatose beast of its ennui.

The five men and one woman on the central bank's monetary policy committee ended their two-day meeting without so much as recommending a painkiller: A quarter percentage point cut in the policy rate was the consensus expectation; the panel didn't even prescribe that.

What explains the surprise decision? After playing second fiddle to the government over the past month, the central bank may be trying to reclaim credibility as an independent institution. Or perhaps it was fear of the Fed that stayed its hand. Reducing rates when the U.S. central bank is about to raise them could weaken the rupee and lead to capital outflows. 

A third explanation for inaction is that the Reserve Bank of India doesn't see itself as playing a helpful role here. After all, monetary medicine is unlikely to be a panacea for an economy where most money has either vanished into bank vaults or been rendered impotent by Prime Minister Narendra Modi's controversial Nov. 8 move to outlaw 86 percent of cash in circulation.

The sudden disappearance of the country's preferred medium of exchange is causing transactions to freeze up across industries. Even exporters are having trouble fulfilling orders because they've run out of legal tender to pay workers. The shock is affecting total demand, which has a 96 percent correlation with the aggregate earnings of companies on the BSE 100 index.

Why Investors Care
Cash ban can destabilize India's nominal GDP, which has a strong fit with corporate earnings
Source: Bloomberg; India Central Statistical Organisation
*Normalized to 100 for March 31, 2003

Nobody knows how to arrive at a good guesstimate of the disruption. The central bank's quarterly GDP forecasting tool doesn't explicitly deal with money. So while it can throw up a number for the expected output gap -- whether activity is likely to be above or below potential -- based on real exchange rates, real interest rates and the state of the world economy, the model is useless at predicting how a demonetization shock would play out.

The inexperienced rate-setting committee, which cast votes for only a second time on Wednesday, chose to err on the side of guarding against "downward inflexibility" in inflation, which may well prove to be a mistake. Banks will get some relief as the $47 billion of deposits sequestered by the monetary authority into zero-interest reserves is getting released. Still, the additional liquidity will be absorbed in other ways. Lenders could use the flood of cheap money rushing into the banking system to trim lending rates slightly, but not by much.

Low on Lubricant
Cash is a fraction of India's bank deposits, but is used in many more transactions
Source: Bloomberg, RBI

For now, investors' working hypothesis must be that India's monetary medics are as clueless about what's going on in the economy's entrails as anybody else. Just how much damage has been caused by what has already become a month of near-cashlessness will be known only when India Inc. starts declaring quarterly earnings in January.

That will, in turn, set the stage for the government's annual budget, which is likely to be presented on Feb. 1. A double dose at that time -- tax cuts combined with a drop in companies' cost of capital -- could see the Indian elephant limp back to normalcy. For a recovery to begin, though, the cash crunch must first end.

Money-less India can't get much out of any medicine. But for the central bank to deny it even a placebo doesn't speak highly of Governor Urjit Patel's bedside manners.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. That's based on the government's old GDP measurement system. The new series is highly unreliable. 

  2. It can even deal with "known unknowns," such as poor rainfall, or a change in the price the government pays farmers for their crops.

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Andy Mukherjee in Singapore at

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Matthew Brooker at