It will be no surprise if December 7 sees a second consecutive rate cut from the Monetary Policy Committee (MPC), which has effectively substituted RBI autonomy, in the disruptive aftermath of a massive demonetisation of November 8 with 86 percent of the money in circulation ceasing to be legal tender.
Not that is of much immediate help to investors unmoved by earlier 175 basis points cuts in the repo rate. With banks themselves yet to transmit the 2016 cuts through their lending rates, corporates and big business prefer to continue to wait till uncertainty on GST gets cleared and the additional damage from cash crunch has also played out.
The real costs of the onslaught will be seen when euphoria gives place to realism. As consumption goes down for lack of cash in the hands of hundreds of millions affecting aggregate demand, a jubilant Finance Minister has to reckon with the "pain”. He concedes this may last even six months. That also reflects on obligations suddenly thrown on the banking system.
India like the rest of the world will be moving into a tougher 2017 amid the global economic slowdown compounded by uncertainty surrounding a new Trump Administration's fiscal and trade policies. OPEC has agreed on supply cut from the New Year and even a limited rise in oil prices would be hurtful for importers like India.
Additionally, US Fed at its mid-December meeting could well resume its rate hikes while the dollar has been gaining strength. The credit markets will be tightening to the disadvantage of countries that rely on capital flows from abroad, especially for important infrastructure building.
Demonetisation has also drawn considerable adverse attention elsewhere for the manner in which it was imposed without adequate preparation within the banking system, leading to "needless hardship" for millions, urban and rural, farmers, in particular, to access cash and the overall disruption of economic growth processes. A "botched execution" was a typical comment.
Far from limiting the damage inflicted, the Modi Government's current preoccupations are how to push India into a digital economy for which the country is least prepared. Issues like jobs, agriculture and health and education have all become secondary or receded to the background.
At last, the Prime Minister acknowledged, at a UP election rally, now the primary focus, the fact of queues of poor and others waiting endlessly for getting cash from banks. He thus corrected his earlier assertion that the poor were soundly sleeping at home, supportive of demonetisation, and it was only the hoarders of black money who had lined up before banks.
Now, the Prime Minister's firm assurance to the masses that their present queues before banks would be their last, as "this queue would end all queues" for the future. Desperation in Government is writ large that demonetisation has not yielded the expected dramatic outcomes concerning cash hoards seized.
Even the Prime Minister, who had perhaps hoped to ride a new popularity wave with such a transformative reform, possible only ''once in a lifetime', cannot now hide a sense of disappointment, let alone the parties leading the opposition and uproar in both Houses of Parliament. It suits him and his Government to underplay their attack though mainly directed at the manner of execution rather than the purpose of demonetisation.
The Modi Government has also been issuing threats to evaders and warning of consequences if they failed to deliver. The tax authorities all over the country had been put on alert for conducting raids on premises of suspected tax evaders and hoarders. Strangely, no matter the war on black money, the earlier amnesty scheme has also been kept attractive.
On the misused Jan Dhan accounts of the poor with a sudden surge in balances after demonetisation, the Prime Minister has warned that any account-holder trying to withdraw above the permissible limit of Rs 10,000 would be liable to action. The idea is to narrow down and catch the offenders who had fed into these accounts.
As a sop, which goes well with an election early in the new year, Mr Modi said Government would put in, out of seized cash, a few thousand in each of these lakhs of accounts which were mostly without any balance hitherto. A pertinent question has been raised in the national debate on cash crunch as to how far Government kept the RBI in the loop because of statutory provisions relating to currencies in Reserve Bank of India Act 1934. These assign to RBI right to issue currency notes, determine the denominations thereof as well as the cessation of particular denominations as legal tender, subject to the recommendations of the central board of RBI. The Act does not visualise denomination without full replacement against other valid denominations.
Meanwhile, the banking system, suddenly faced with a mammoth task of printing new currency notes, struggles hard to meet the cash requirements of customers even for limited amounts. But its deposits swell and this excess liquidity, brought under 100 percent CRR, will be soaked up by Government securities in coming weeks. In effect, this will significantly strengthen Government's fiscal position.
The Monetary Policy Committee (MPC) meeting on December 6 and 7 will take stock of the economic and monetary trends, global and domestic, and throw light on the evolving situation with several negative factors coming into play after demonetisation. Its policy guidance and revised projections on price and output would form part of a resolution which RBI will communicate on December 7.
Recent global outlook reports of IMF, OECD and United Nations have preceded the demonetisation in India. But a common message in all these reports is that the slowed global economy would require fiscally promoted growth as the collective effort of all nations, monetary policy options having been exhausted.
Given the margin of comfort now available in India's fiscal base, the Finance Minister would do well to give a further boost to public investment to create a few jobs at least and fund sadly neglected social programmes for meaningful, inclusive growth.
India's growth projections in the global reports are 7.6 percent for both fiscal 2016 and 2017 (IMF and OECD) and 7.3 and 7.5 percent in UN report on World Economic and Social situation. Despite some delays in domestic policy reforms and enduring fragilities in the banking system, investment demand is supported by the monetary easing cycle, rising FDI, and government efforts towards infrastructure investments and public-private partnerships, the UN report noted.
(The views expressed are strictly personal.)