As Cash Shortage Leads To Manufacturing Contraction, Economic Shockwaves, Indian Banks Slash Interest Rates

Tyler Durden's picture

Over 50 days after Indian Prime Minister Narenda Modi stunned India's population when he announced on November 8 he would unexpectedly eliminate 86% of the existing currency in circulation in what was supposed to be a crackdown on the shadow economy, but instead has resulted in a significant hit to the broader, cash-based economy, overnight we noted the first official confirmation of how substantial the impact of Modi's demonetization has been, when the Nikkei India Manufacturing Purchasing Managers Index printed at 49.6 in December, the first contraction reading since December 2015, as the war on cash crippled demand.

According to the report, output and new orders fall for first time in one year; companies reduced buying levels and payroll numbers; Input cost inflation accelerated, while charges rose at softer rate.

Commenting on the report, IHS Markit economist Pollyanna De Lima said that “having held its ground in November following the unexpected withdrawal of 500 and 1,000 bank notes from circulation, India’s manufacturing industry slid into contraction at the end of 2016. Shortages of money in the economy steered output and new orders in the wrong direction, thereby interrupting a continuous sequence of growth that had been seen throughout 2016. Cash flow issues among firms also led to reductions in purchasing activity and employment.

Looking at the upcoming timeline of cash exchanges, she noted that "with the window for exchanging notes having closed at the end of December, January data will be key in showing whether the sector will see a quick rebound.

As Bloomberg added, other recent data also mirror the stress. Motorcycle maker Bajaj Auto Ltd.’s total sales slipped 22 percent in December, the steepest fall in at least 21 months. Motorcycle sales, a key indicator of rural demand, declined 18%. India’s biggest automaker by volume, Maruti Suzuki Ltd., reported a 4.4 percent drop in domestic December sales, the first decline in six months, while overall sales fell 1 percent from a year earlier.

A continued slowdown will strip India of its position as one of the world’s fastest-growing big economies and risk a political backlash against Modi. On Wednesday another key economic report is due, when the Service PMI data is due before focus shifts to the government’s first official growth estimate for the year through March.

India’s economy, which until recently was expected to be the world's fastest growing, large economy, outpacing China...

... is now expected to grow 6.9% in the year through March, according to a consensus estimate. That’s well below the 7.3% predicted by a survey in November and the previous year’s 7.6% actual expansion. At this rate of deterioration, China, and its "goalseeked" 6.5% annual growth rate may soon regain the top spot among world economies.

Meanwhile, in an attempt to offset the slowing economy as a result of the Prime Minister's unprecedented demonetization gamble, overnight Indian banks, led by market leader State Bank of India, announced sharp cuts to their lending rates after the recent surge in deposits as ordinary Indians brought their cash to the bank for "safekeeping", raising hopes that lower borrowing costs will help spark credit growth in Asia's third-largest economy.

On Sunday, State Bank of India, India country's biggest lender by assets, said it had cut its so-called marginal cost of funds-based lending rates (MCLR) by 90 bps, while unveiling new products for mortgage loans, one of the fastest-growing areas. Other lenders including Punjab National Bank, Union Bank of India, Kotak Mahindra Bank and Dena Bank followed suit and also cut their lending rates by 45-90 basis points across tenures. Analysts expect more lenders to follow suit.

Banks have received 14.9 trillion rupees ($219.30 billion) in old 500, and 1,000 rupees notes from depositors since Modi's cash overhaul. That had raised expectations banks would have room to cut lending rates, which is seen as vital to increase credit growth and spark a revival in private investments.

Cited by Reuters, Arundhati Bhattacharya, chairman of SBI, said at a news briefing on Monday, the rate cuts were intended to "jump start" credit growth and could raise it by 100-200 bps in the year ending in March. Even if accurate, it remains to be seen if such credit growth will have an offsetting impact on economic growth.

SBI now expects credit growth for 2016/17 fiscal year to be 8-9%, Bhattacharya said, still lower than the lender's previous formal guidance of 10-12% growth. Any signs of a revival in credit could ease some of the worries from Modi's move, which has sparked a severe cash shortage that has paralyzed parts of the economy.

The rate cuts also come after Modi on Saturday warned banks to "keep the poor, the lower middle class, and the middle class at the focus of their activities," and to act with the "public interest" in mind.

Modi's comments were made in a special New Year's eve speech in which he defended his ban on higher-value cash notes and announced a slew of incentives including channeling more credit to the poor and the middle class.

Some have expressed optimism that the combined impact of banks cutting lending rates and subvention provided by the government to small businesses is likely to help turn around growth faster than expected in the next fiscal year," said Saugata Bhattacharya, chief economist at Axis Bank, the third-biggest Indian lender. Many others remain skeptical.

For now, however, the immediate impact was on Indian Bonds, which rose after SBI's interest cutting announcement, pushing the yield on the sovereign note due September 2026 to 6.4% from 6.51%. If anything, this is the latest sign that in a world drowning in leverage, and whose economy is priced to perfection, any ongoing "tightness" and rising rates, will only lead to adverse consequences not only in Emerging Markets, but developed ones as well.

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LawsofPhysics's picture

Define "cash"...


I still see people all around the planet accepting paper/digital promises (created out of thin air with no real work or real RISK) in exchange for all the real risk and real work they do...

See the problem yet?

07564111's picture

Yeah Indians see the problem, it's name is Modi and he's a dead man walking when this comes crashing down.

JRobby's picture

Looks like they didn't think this plan through completely..........

holgerdanske's picture

"Looks like they didn't think this plan through completely.........."

Looks like they didn't think!

MalteseFalcon's picture

Here's the thought.

"Let end the black market."

I imagine it is huge in India.

The little guy gets hurt?

That's an added benefit!!

Because of endless FED and government screw ups in the 1970s, the black market in the USA was getting large enough to the point where it was going to become a permanent fixture in the America economy.

That was when and why Volcker stepped in and raised interest rates.

These days the solution is to end cash.

Much more effective

LawsofPhysics's picture

"These days the solution is to end cash" --  Making people focus on cash itself!!!!

This is NOT going to work and your comparison to the 70's is BULLSHIT!

Why?  Simple, people focused on interest rates (That's what Volker fucked with)!!!  Hence people started Saving!!!!

Not going to have the same effect at all!!!!

Go ahead, ban cash and watch the black market EXPLODE!!!!

Uwantsun's picture

No cash equals black market. Common sense really.

MalteseFalcon's picture

Black market with cash >>> black market with barter.

MalteseFalcon's picture

Maybe you need a drink or something?

You missed my point.

I'm completely against the ban on cash.

My comments were sardonic.

Anyone who reads my stuff would know that.

Volcker raised rates to end the financial repression game, as people were leaving the mainstream economy to avoid taxes that rose with inflation.



Wulfkind's picture

AAAAaaaaannnnnnddd....another one goes for QEtermity.

Watch for it folks......starting this year the accleration of currency destruction ramps up noticeably leading to withing 15 years or less the abolition of all hard and paper currency for what will all intents and purposes be a one world dgital currency.

Regardless of Trump who is a slight speed bump.....( I mean, really, after 6,000 years of various people and plans for world domination, somehow Trump is going to be an impediment )....

the Iron Curtain of the NWO continues to drop.  Don't watch the politicians....they're just there for the show.  Watch the Banks and the Credit Card companies.  Watch certaiin denominations of currency start to wink out of existance like stars going nova in the night to disappear as black holes.

Between Total Situational Awareness by the NSA and CIA and MI 6 and various spy agencies around the world to huge databases sucking up every digital bit of info on every human on the planet....( and that's just from your rewards cards....not to mention your cell phone, your credit card, your Alexa or Cortana or Siri or OK Google or your smart fridge or smart TV or smart Thermostat or smart Light Bulb, etc.).....the NWO continues unabated and WILL CONTINUE unabated regardless of Lord High Trump.

Kefeer's picture

Many plans are in a man's heart, but the Lord's decree will prevail.

rejected's picture

Anyone with a mortgage, auto loan or 'credit' card contribute more to the creation of money out of thin air then the central banks and governments.

And why does anyone think it's called debt based?

Most I see complaining about the central banks printing have one or two mortgages, a couple three cars and a dozen 'credit' cards. Kind of like the pot calling the kettle black.

LawsofPhysics's picture

Not quite.  How many people/corporations do you know with access to hundreds of billions for ZERO percent interest?

See what happens when you reward bad behavior?

Wulfkind's picture

Anyone with a mortgage, auto loan or 'credit' card contribute more to the creation of money out of thin air then the central banks and governments.

And why does anyone think it's called debt based?

Most I see complaining about the central banks printing have one or two mortgages, a couple three cars and a dozen 'credit' cards. Kind of like the pot calling the kettle black.


They also complain about government and then go to the polls and vote 90% + of the same bastards back into office.  And then hope every 4 years for either a Magic Negro or a Billionaire Real Estate Scam Artist to save America.

Most are armed too.  Yet they're too ball-less to use them as the Founding Fathers did.

flaminratzazz's picture

The farmers cant plant ..Big BIG fvkin problem

Food Loaf Junkie's picture

+100  This hit all the subsistance farm families the worst.  Any cash reserve they had built up in order to pay for seed and NOT have to borrow at exhorbitant rates has been stolen by the government.  Look for suicide rates to go waay up and children to be sold into the sex trade.  Starvation will be rampant and as always We will be told we have to feed them.  A bankster twofer as they steal from India's poor and play the grain futures market shortage they will create.  I am so disgusted.

flaminratzazz's picture

The human race seriously needs a well trained vigilante hit team

Clara Tardis's picture

Mr. Modi has a basic math problem:
One Modi and handful of moneychangers -vs- a few million hungry Indians.

Pieter Bruegel the Elder's picture

Lol. Like this will help anyone at the bottom layer of India.

BandGap's picture

They are disposable.

This was all planned.

Hongcha's picture

Yes.  India was chosen because it is a very large nation with a very cowed, passive and disarmed populace ready to do what they are told after a few beatings.

It was by simple process of elimination, arrived at that the shakedown cruise would go to Cap'n Modi of H.M.S. HINDOO.

He should be hanging from his heels.

jomama's picture

And this folks, is why we export inflation.

actionjacksonbrownie's picture

Just like the Gold confiscation in the 30's. Collect/concentrate everyone's wealth (currency), then devalue it by decree. 

Kefeer's picture

The % of people that actually turned it in was quite low from my understanding.  Anyone know the actual and factual percentage?


Buy ONLY sovereign coins; stay away from generics and "goofy crap" like the skull & bones or pirates et al.  Confiscation of money is unlikely and almost all the sovereign are IRA approved.

AC_Doctor's picture

I was hoping to get a better deal on some hot curry spices...

DirkDiggler11's picture

This move begins to explain the Indians love affair with Gold. They've been screwed by Fiat far too many times.

GooseShtepping Moron's picture

This is the real India. The high-tech, high-growth, burgeoning new world economic powerhouse India was never anything but a media myth. Anything to obscure the fact that there is no global growth and thus the debt-based financial system is losing its reason to exist.

38BWD22's picture



I did not see much of that high-tech stuff in India when we were there (as tourists a year ago).  We did see LOTS of dirt-poor rural areas and villages.  Nor do I see India as a powerful growth story, at least for now.

Agree re no global growth.

Mile High Perv's picture

No or low growth is good. Most of humanity's problems stem from an unhealthy obsession with (unsustainable or unbridled) growth. See

GRDguy's picture

That's what happens when governments lie and steal.

Kinda like reducing blood flow to capillaries. Extremities start dying off. 

overmedicatedundersexed's picture

paki's are drooling and high five all India implodes with a leader more stupid and corrupt than even the nigger ...they just may be tempted to take Kashmir sooon.

Soul Glow's picture

Does that mean I can has moar free monies?

AlNiko's picture

Here is the fun:

Indian central bank (RBI) data shows that after promoting cashless economy since Nov 08, 2016, the value of total credit/debit card transactions as well as online transactions in India declined steeply.  This is despite an increase in the number of such transactions !!

For instance in October there were 229 million debit/credit transactions worth Rupees.511 billion.  By December there were 238 million transactions valued

at Rupees 397 billion, a decline of nearly 22%.  What a way to promote cashless economy.


No surprise the mercenaries of Modi have vanished from ZH with their squeals hardly heard anywhere now.

user2011's picture

There is an old saying, "when the thing is working, don't fuck with it". Not only it fucked with the locals, it also messes with anyone trading with India.

large amount of wealth is gone. Gold is banned. People in India now are stucked being poored or has to hold foreign currencies. And the fate of the whole nation depends on other countries currencies. Sad.

Soul Glow's picture

Gold isn't banned, but it is being confisscated from the poor by the authorities.  Yet remember prohabition - when something is illegal it gains value as it is harder to get.  So black market gold will see a jump, especially when people realize paper money is gone for good.

GreatUncle's picture

The problem with confiscating real gold ... ha ha ... what you going to say about the paper ETF's if they are not confiscated?


Or do those doing the confiscating have the funds to cover the 250x gold ETF's?

Once started watch the rest of the fiat start to have serious questions asked about it.

holgerdanske's picture

I get depressed.

Whenever there is a person that says something I think too, he can't spell.

I wonder if I am siding with the wrong team. ;-)

LawsofPhysics's picture

Yes, if you ever want something to be in high demand, have the government make it "illegal"...

same as it ever was...

holgerdanske's picture

The position as the dumbest head of state will become vacant in 18 days.

I think we have a strong contender for the position in Modi.

Almost done deal, -- if he survives that long.

GreatUncle's picture

Lol Indian manufacturing ... if the population is poor it is not them so who?

Yup-dee-doo the west.

Now from what I can see there is no sustainable increase in demand so how does that work out for you in places like India?

THE ONLY GROWTH IN THIS WORLD IS CTRL-P and anything else if it contracts the system will crunch existing economies.

Modi accelerated the crunch is all.

Kefeer's picture

Borrow cash and buy gold or silver - go Indians go!!

native grunt's picture

Modi is just a bullshit artist. No depth in his economic thinking, no emphathy with the poor in India. I cannot claim that 

am sympathetic to the my fellow Indians, but what distinguished all former Indian prime ministers until this clown is

that they would never do anything to deliberately harm the poor.

hedgiex's picture

India's sovereign bond at 6.5% is a steal (meaning too low) for a basket case unless you still believe the lagging Country Risk Reports. The domestic interest rate has to go to at least ZIRP to sustain the Corporations (vested interests) to stay alive to hustle for their share in the global diminishing demand. Great way to start 2017 where Modi's Politics trumph its economic poicy that however is the gold standard of most Asia emerging markets economies.