Demonetization of high denomination notes, by Prof. Charan Singh

Prime Minister Narendra Modi has announced demonetization of high denomination currency keeping in view the manifesto of the party to fight corruption and respecting the sentiments of voters.  Despite the pain which people are facing in the exercise, generally the scheme has been hailed by Indians across the spectrum.  The sentiments are positive and encouraging. In 1946 and 1978, similar demonetization was done in India but the scale at which it is being done now is unprecedented.

First, some facts about the demonetized currencies. The note of Rs. 500 was introduced in October 1987-88 while notes of Rs.1,000 were discontinued in January 1978 and reissued in November 2000. The history of Rs.1,000 note is interesting.  It was first introduced in 1938 under the British rule and then demonetized in January 1946.  Once again it was introduced in 1954 and demonetized in 1978 to be re-introduced in 2000.  The indent of Rs.500 and Rs.1,000 have generally been higher than the supply sharing the preference of the people.  The notes are injected into the economy through 4102 currency chests spread across the country. The total currency in circulation as on end March 31, 2016 is Rs. 16,415 billion of which notes of Rs.1,000 denomination account for 38.6 per cent (Rs.6,326 billion) and Rs.500 account for 47.8 per cent (Rs.7,854 billion).  The number of notes in circulation, in terms of volume, are 903 billion of which Rs.1,000 account for 7 per cent (63 billion) and Rs.500 for 17.4 per cent (157 billion).  The importance of Rs.500 has been increasing over the years, from 4.1 per cent on March 31, 1990 to 47.2 per cent on March 31, 2016.  Similarly, the share of Rs.1,000 note has increased from 1.7 per cent in 2001 to 38 per cent in 2016.

Malaise of Corruption impacts Economic Growth

The malaise of corruption which has been harming the country has various implications for the economy.  Corruption undermines the government’s ability to deliver economic growth and adversely affects a number of variables like macro financial stability, investment, human capital formation and productivity.  It can also lead to distrust of government policy which if becomes pervasive can lead to violence and conflict with social and economic implications.

Prevention of corruption needs strong policy deterrence which requires effective administrate system, and technology based data processing to generate actionable intelligence.  In India, black money is estimated between 10 and 30 per cent of official national income. The Modi government, in the last two years, has initiated various measures to fight corruption like transparency in decision making, enhancing rule of law, deregulation and simplification of rules.


Demonetization of high currency notes has a two-fold objective – first, choking the funding channels of militancy and terrorism from across the border.   In the last few years large number of counterfeit notes were regularly discovered in states infested with terror activities.  Thus, demonetization will certainly paralyze financing channel of terrorist activities.  The other objective, to fight corruption, is rather complex and needs to be addressed persistently through different ways.

Implications of Demonetization

The economic implications of demonetization are many and yield mixed results.  First, it would inspire confidence of international community that India is serious about its commitment to fight corruption.  This will enhance India’s ranking in ease of doing business as well as in various global indices of corruption.

It is rather difficult to predict the impact of demonetization on the economy.  The immediate pain in terms of non-availability of required currency notes if not corrected soon, may reflect in reduction of output in agriculture because of its timing being close to sowing season and which may spillover to industry and services.  Similarly, in the long run, implications could be uncertain.  On one hand, confidence in efficient management of the economy should lead to positive effect while shock strike at unaccounted economy could lead to shrinkage in production, especially in informal sector including micro, medium and small enterprises.

If the efforts of the government result in unearthing substantial amount of dormant money implying that stock of money would become a flow, then theoretically, prices would go up as more money would be chasing limited amount of goods.  On the other hand, if there are liquidity constraints impacting production because of non-availability of required currency notes, then inflationary pressures will be subdued along with lower production. Similarly, though exchange rate is depreciating in short run because of high demand of US dollars, but medium to long term trend would depend on growth and inflation.

As demonetization was planned beforehand, Government must have factored in repercussions like sluggishness in stock and housing market, and in general, government’s tax revenue in quarters ending December and March. But if the Government is able to garner substantial amount of unaccounted money, it will add to revenue in the Budget. The issue of new notes, would enhance the seignorage of the Reserve Bank of India, leading to higher dividend for the Government.

The severity of demonetization could result in enhancing fear of placing deposits in banks to avoid detection, and people may pursue other alternatives.  Further, people may even be cautious in holding high denomination currency in their homes, which may get diverted to investing in gold, real estate and other activities.  However, mistrust between the government and the private sector may need to be addressed so that currency is held by the public with confidence rather than with uncertainty and fear.

The expected introduction of Goods and Sales Tax (GST) in April 2017 would have led to better observation of accounting standards. Demonetization would hasten the process of such accounting standards because of shift from currency to digital payments and banking.

Greater use of Digital Money?

Would demonetization lead to popularising digital money?  A number of factors need to be taken into consideration. India is a very diverse country in terms of languages and scripts. Also, the country has low level of literacy of about 70 percent, and English literacy of not more than 10 per cent of the population.  Given the fact that all electronic devices have English numerals and all communication on digital banking is also in English, there is natural barrier to completely digitalize Indian economy during immediate period.

India continues to have 30 per cent of population or nearly 40 crore people below poverty line.  These people could also be slow in embracing digital economy.

90 per cent of the Indian population operates in informal sector. Illustratively, the transport sector including taxis, auto /cycle rickshaws, horse carriages and bullock carts   are all on cash payment as also most of local markets/shops/dhabas and similar business outlets, especially in rural areas.  Though, banking penetration has increased in last two years, but change in habit of shifting from cash to digital would take time. In addition, low volume of business in rural shops, shopping sheds, rural make – shift Kiosks may not justify the cost of installing equipment to read and safely secure the data on plastic money.   However, in the medium to long run, advantages of digital economy will certainly prevail because of the ease of doing business and swiftness in settlement of accounts.

Some Suggestions

However, the recent demonetization has only hit the stock of unaccounted wealth kept exclusively in form of currency.  But the flow, to curb regular accumulation of more unaccounted money, also needs to be addressed. That can be done in two ways – First, instituting a mechanism of incentivizing tax compliance and punitive and demonstrative deterrent for those caught while generating black money. Second by extensive financial literacy on harmful impact of unaccounted money – ranging from personal health to national loss. This should become part of school and college curriculum.

It is a unique experiment in the world with no precedence.  To understand the dimension of the problem consider an illustration where 86 per cent of blood in the body has to be changed while the patient is working normally and is not in ICU.  Thus, in tirelessly undertaking this herculean task commercial bankers need to be applauded. The work is still incomplete and expected to last a few more weeks, given that ATM machines have yet to be calibrated.  Therefore, with hind sight, to ease the pressure on branch and considering convenience to customer, commercial bankers can consider organizing kiosks at secure places like schools/colleges/hospitals for exchange of limited quality of notes. Only customers with large requirements, need to go to the branch.

So the whole operation was kept secret as necessitated.  But the last mile turned out to be rather difficult as serpentine queues outside every branch and every ATM of the country were proof of the fact that bank branches were not battle ready.  While the Indian Army was sufficiently trained to do highly advanced surgical operation across the border and still be able to undertake relief operations during Chennai floods, the bankers, though hard working and dedicated, were not able to rise to the battle cry.  A similar thing was noticed earlier when the increase in number of Jan Dhan accounts was accompanied with increase in NPAs, reflecting lack of monitoring and diversion of attention from loan accounts.  A similar rise in NPAs can be anticipated and to address this issue, Government can duly compensate commercial banks for deploying resources and manpower for the success of demonetization.

India is the fastest growing economy of the world with a small Current Account Deficit, sufficient fiscal space, low inflation, and rising foreign exchange reserves. In fact, India with nearly 60 percent of population below 35 years will be unchallenged for next half a century. Hence, despite pain, the country is unified in this rare opportunity, to cleanse the economy from cancer of corruption, on its way to become a superpower.

Prof. Sankarshan Basu on the “Measured Response to High Frequency Trading”

 Measured Response to High Frequency Trading

The Hindu Business line, July 31, 2016

Anand Sasidharan and Sankarshan Basu

High Frequency Trading (HFT) is a subset of Algorithmic Trading (AT) in which timing, price and order execution are done without human intervention. HFT has grown to reach about 40 per cent of the total trades in India. It is likely to be the dominant mode for trading in the near future. In this context, there are some regulatory concerns, as HFT becomes prolific.

High frequency trading hunts for temporary pricing discrepancies in the market and trade quickly before it disappears. It monitors market fluctuations and then executes trades at the speed of light. The speed with which it does this, known as latency, is what drives the competition in this industry. This competition for speed is often compared with a technological arms race, with HFTs competing to access data microseconds faster than the rest. To facilitate such ultra-low latencies, most stock exchanges offer collocation services, which is the placement of HFT platforms very close to the exchange servers.

Constant up-gradation of technology and algorithms is crucial for HFT to survive, since most of the HFT algorithms have very low shelf life as markets are evolving very fast. They also face the risk of reverse-engineering (the controversial conviction and later acquittal of Sergey Aleynikov for allegedly stealing Goldman Sachs algorithm is a good example) and the risk of an algorithm turning out to be rogue.

With direct market access, a rogue algorithm has the potential to create havoc in the market. Yet, we do not have clear regulations defining who can develop, test, modify, and place an algorithm into production.


The debates on the benefits of HFT revolve around its impact on spreads, liquidity and market quality. From this point of view, HFT has the potential to improve the market quality if it can quickly incorporate information into prices. But, in reality, HFT has no interest in acquiring information about companies. It is not ‘investing’ in the conventional sense and, therefore seldom carries positions overnight.

Many advocates point out that competition in HFT can eliminate the price-arbitrage opportunities. But research shows that the very presence of continuous time trading creates mechanical arbitrage opportunities. For instance, an ETF and a futures contract that track the same underlying security may be perfectly correlated in the course of an hour. But, such correlations disappear in high-frequency time scales, thus providing mechanical arbitrage opportunities. Competition in HFT will not eliminate such arbitrage opportunities; instead it can only raise the latency (speed) bar for capturing them. One remedy is to move to discrete-time trading, where the trading day is divided into frequent but discrete time intervals of minuscule length.

Exchanges love HFT as it can increase trade volumes and its advocates reiterate the benefits HFT can have in improving liquidity. But, most likely HFT appears only where there is sufficient liquidity, and is not necessarily created by it.

Remedies and regulation

Exchanges will benefit from the volumes HFT can bring in. No wonder, NSE and BSE have been actively marketing their co-location infrastructure. However, they need to tread cautiously.

In 2012, SEBI instituted a fee for AT orders which have a high daily order-to-trade ratio (OTR). The objective was to check repeated management of orders without generating trading volume. In spite of this, the 2015 financial stability report (FSR) by the RBI finds that among the total cancelled orders, the share of AT orders is 90 per cent.

This is reminiscent of an ‘illegal’ HFT strategy such as layering, which creates an illusion of a significant investment happening in a stock to generate a price movement favourable to the trader. This is done by posting bids and immediately cancelling them at high frequencies, thereby building pressure on the stock price.

Along with the existing caps on OTRs, a cap or fees on excessive use of HFT methods should be considered.

To hedge any risks that can arise from the prolific growth of HFT, the exchanges should ensure that, there are: Limits on orders, positions and losses that can be made intra-day; a kill-switch (circuit breaker) to stop trading at different levels; and make orders rest on the exchange books for a discrete time, such as half-a-second.

The article can be accessed at

The top challenges facing U.K. Sinha


The top challenges facing U.K. Sinha


Now that U.K. Sinha has gotten one more year as chairman of the Securities and Exchange Board of India (Sebi), what should he do? While it is tempting to continue the trodden path—more rules, more enforcements and so on—we believe that he can do something else that will have far more impact on the future of Sebi and for India’s financial markets. It is the transformation of Sebi itself from a bureaucratic, ad-hoc and reactive regulator to an agile, research-driven and proactive regulator. Obviously, this effort cannot be completed in a year but he can at least set it in motion. At Sebi now, rule-making is often arbitrary and appears to be based upon strongly held opinions rather than an evidence-based determination arrived at after weighing competing arguments. Enforcement actions are selective and often not commensurate with the size and nature of the offence. The process seems to be reactive, not proactive. The recent financial crisis exposed the shortcomings of the reactive, piecemeal approaches of regulators worldwide and led to calls for a coordinated, data-intensive, proactive approach that seeks to isolate risks before they materialize and destabilize markets. Without the capability to understand complex new financial products and the research that makes them possible, regulators can hardly be expected to do their jobs effectively in an integrated financial marketplace. In other words, it is critical that tomorrow’s regulator be agile, flexible, data-driven, research-friendly and tech-savvy. Transforming Sebi in this manner is, in our opinion, the most important task ahead for the chairman. You are probably wondering why we do not mention specific challenges such as investor protection (from practices such as misselling of financial products or fraudulent investment schemes) or in market development (such as corporate bonds). It is because we believe that the effectiveness of everything that Sebi does, including addressing these urgent priorities, depends on the quality of its rule-making and enforcement framework. Our aim is, therefore, to highlight the need for structural reforms at Sebi and, we suspect, at other regulators as well. A reformed Sebi would make for a more successful regulator, one that is not structurally behind the entities that it regulates, one that has processes in place to address current and potential regulatory transgressions more effectively. Such a transformation must start with people. According to its recent annual report, only a quarter of its workforce has any legal training or accounting background while there are almost no economists on its payroll. In contrast, nearly half of its employees carry general purpose MBAs. Enforcement actions originating from such a workforce are more likely to lack legal basis and may not stand up i n the courts of l aw. Rules without proper enforcement promote moral hazards and increase costs of trading, and eventually cost of capital for our firms. Good policies require good data and research to guide them. While it is not unusual to see global regulators put out data and encourage academic assistance in analysing the data, Sebi has been markedly reserved in this effort. Most of its research is conducted in-house and rarely shared with the broader research community. Without transparency, it is hard to determine whether Sebi’s proposals are really rooted in sound economic rationale or are just a simple response to a complex problem that could potentially do more harm than good. The backtracking by Sebi on its safety net proposal for retail investors in an initial public offering is one such example of a proposal backed by in-house research that did not pass muster either with experts or market participants. Given that there are significant costs to be borne by market participants, it is absolutely critical for Sebi to base its decision-making on transparent, data-driven research. Regulating India’s financial markets is still a work in progress. Globally, organizations such as the Bank for International Settlements, the US Securities and Exchange Commission and the European Securities and Markets Authority routinely engage academic researchers in creating and advising on their regulatory initiatives. India’s approach has been to rely on the recommendations of expert committees with limited academic inputs. Greater provision of data could help address this shortage and catalyse data-driven policymaking. Increased participation of the research community facilitates deeper understanding of issues and allows regulators to assess the true costs and benefits of regulation, objectively using the best-of-breed scientific tools and techniques.

Program Partnership with the CFA Institute


IIM Bangalore welcomed into CFA Institute University Program Partner initiative


MUMBAI, 20 January 2016 –  The CFA Institute is pleased to announce that the Indian Institute of Management Bangalore (IIMB) is the first business school in India to become a University Program Partner.


The Post Graduate Programme in Management (PGP), offered by IIMB is one of the most renowned in the country. Therefore it is no surprise that over 70% of the content of relevant courses in that program conforms to the CFA Programme Candidate Body of Knowledge.  The PGP program emphasis on ethics also reflects the CFA Institute Code of Ethics and Standards of Practice.


The CFA Program sets the standard for developing the skills, standards, competence, and integrity of financial analysts, portfolio managers, investment advisers, and other investment professionals worldwide. It is widely considered the investment profession’s most rigorous credentialing program.


Entry into the CFA Institute University Program Partnership signals potential students, employers and all stakeholders that IIM Bangalore’s PGP curriculum is in sync with professional practice globally. As a result of this partnership, in each fiscal year, IIMB is entitled to award scholarships to a fixed number of PGP students to take up the CFA Program.


“For several decades, the CFA Institute has been committed to building a better investment management profession. It mixes the best of investment analysis theory and practice while training individuals with the highest ethical and professional standards. We look forward to collaborations between the CFA Institute, IIM’s Centre for Capital Markets and Risk Management (CCMRM) and the Finance and Accounting area. IIM-Bangalore is pleased to become the CFA Institutes’ first Indian program partner.“ Sushil Vachani, Director, IIM-Bangalore.


“We are delighted to welcome IIM Bangalore as the first Program Partner in India.  We hope to work together to build a program of research and outreach that will have an impact on financial market development in India. We see significant synergy between the two institutions, and we believe that our efforts will contribute to the creation of a strong talent pool for India’s investment management profession,” said Vidhu Shekhar, Country Head, India, at CFA Institute.

About CFA Institute

CFA Institute is the global association of investment professionals that sets the standard for professional excellence and credentials. The organization is a champion for ethical behavior in investment markets and a respected source of knowledge in the global financial community. The end goal: to create an environment where investors’ interests come first, markets function at their best, and economies grow. CFA Institute has nearly 135,000 members in 145 countries and territories, including 128,500 CFA charterholders in 144 countries, and 147 member societies in 73 countries/regions. For more information,




About CFA Program

The CFA Program sets a standard for developing the skills, standards, competence, and integrity of financial analysts, portfolio managers, investment advisers, and other investment professionals worldwide. It is widely considered the investment profession’s most rigorous credentialing program. Administered in English, the CFA curriculum and examinations are identical worldwide. Fewer than one in five candidates who begin the program successfully complete it and go on to earn the coveted CFA charter, the “gold standard” for investment professionals.


About IIM Bangalore

The Indian Institute of Management Bangalore (IIMB) believes in building leaders through holistic, transformative and innovative education. IIMB is an acknowledged hub of academic activity in India and globally. We are Equis accredited. The accreditation is an indication that recognized institutions satisfy international standards. Our programs are all very highly placed in global rankings by the Financial Times.

Recognizing the tremendous power of disruptive technology, we became the first IIM to partner with the world’s most respected Massive Open Online Course (MOOC) platform, the Harvard-MIT joint venture, edX. With technology, we have reached out to over 120,000 learners in 189 countries till date.

For more information,
For more information on the partnership, contact:

Salil Jayakar

CFA Institute

+91-70456 87041


Kavitha Kumar

IIM Bangalore


Media Mentions, Winners of the Bloomberg Contest.

The winners of the Bloomberg All-India Investment Challenge were featured in The Hindu & The Hindu Business Line recently. The winning team comprising Rohit Jain, Amritha Kini & Shrirang Chilapur were felicitated by Prof. Badrinath, Chair, CCMRM. Also present on this occassion were Roshni Saigal from Bloomberg Data Services and Prabhu Venkatachalam, Manager, CCMRM.