India’s Cashlessness Drive or A Rudderless Cacophony


Is there a plus out of going less-cash dependent rather than  going cashless? Yes, on the negative interest rates issue, these appear to be better than Quantitative Easing to turbocharge an economy from a recession, BUT only in cases of advanced economies and definitely not in the case of an economy that is purportedly to be the fasting growing emerging one according to the whims, fancies and vagaries of WB/IMF statistics. Why is the case?

Presently, the interest rates are zero bound (though India is largely outside the bracket meaning all the more vociferously that this sudden sweep has been misplaced at the very top trickling down to the bottom in treacherous wringing. but imagine for a moment that India too faces this movement of rates towards the ignominious ‘0’), i.e. cannot fall below zero. And then there’s the sacred rule of

Real term interest rate = Nominal Interest Rate – Rate of Inflation

In 2008, with advanced economies like US having less rate of inflation the room to cut interest rates was pretty much restricted considering the US Fed had set a target rate of inflation as 2%. With a less-cash society the Central Bankers can set interest rates to negative which basically means that you need to pay the bank to hold your deposit. Now keep in mind that the debate is still out over whether the three tranches of QE actually did good.

The author (KR) acknowledges that negative interest rates might give rise to strange situations like for example in case of a bond holder – the borrower needs to pay the lender. Legal and administrative issues can arise but they can be handled as the payments due can be deducted from the principal in this case.

There’s one interesting alternative to negative interest rates shared in the book from the academic economic circles – the two currency system.

It calls for identifying as paper currency and currency in electronic form in banking system as two different. And it calls for an exchange rate when a person goes to the bank to deposit his paper currency which will ultimately be recorded in the banking system as an electronic form. This will give rise to three monetary instruments which the Central Bankers can then play with –

  1. Interest rates on electronic currency
  2. Exchange rate b/w Electronic and Paper Currency
  3. Forward (future) exchange rate

As these days the chatter increases about digital or crypto-currencies, Rogoff is of the view that these innovations are admirable but these currencies are at a major disadvantage as the govt. has tremendous power at its disposal to impose its will over them. But eventually, the technology like public ledger will be adopted, and that would eventually be taking off from #Blockchain.

Is India following the playbook in The Curse of Cash? On motivation, yes, absolutely. A central theme of the book is that whereas advanced country citizens still use cash extensively (amounting to about 10% of the value of all transactions in the United States), the vast bulk of physical currency is held in the underground economy, fueling tax evasion and crime of all sorts. Moreover, most of this cash is held in the form of large denomination notes such as the US $100 that are increasingly unimportant in legal, tax-compliant transactions. Ninety-five percent of Americans never hold $100s, yet for every man, woman and child there are 34 of them. Paper currency is also a key driver of illegal immigration and corruption. The European Central Bank recently began phasing out the 500 euro mega-note over these concerns, partly because of the terrorist attacks in Paris.


On implementation, however, India’s approach is radically different, in two fundamental ways. First, I argue for a very gradual phase-out, in which citizens would have up to seven years to exchange their currency, but with the exchange made less convenient over time. This is the standard approach in currency exchanges. For example this is how the European swapped out legacy national currencies (e.g the deutschmark and the French franc) during the introduction of the physical euro fifteen years ago. India has given people 50 days, and the notes are of very limited use in the meantime. The idea of taking big notes out of circulation at short notice is hardly new, it was done in Europe after World War II for example, but as a peacetime move it is extremely radical. Back in the 1970s, James Henry suggested an idea like this for the United States. Here is what I say there about doing a fast swap for the United States instead of the very gradual one I recommend:

 “(A very fast) swap plan absolutely merits serious discussion, but there might be significant problems even if the government only handed out small bills for the old big bills. First, there are formidable logistical problems to doing anything quickly, since at least 40% of U.S. currency is held overseas. Moreover, there is a fine line between a snap currency exchange and a debt default, especially for a highly developed economy in peacetime. Foreign dollar holders especially would feel this way. Finally, any exchange at short notice would be extremely unfair to people who acquired their big bills completely legally but might not keep tabs on the news.

In general, a slow gradual currency swap would be far less disruptive in an advanced economy, and would leave room for dealing with unanticipated and unintended consequences. One idea, detailed in The Curse of Cash, is to allow people to exchange their expiring large bills relatively conveniently for the first few years (still subject to standard anti-money-laundering reporting requirements), then over time make it more inconvenient by accepting the big notes at ever fewer locations and with ever stronger reporting requirements.

Second, my approach eliminates large notes entirely. Instead of eliminating the large notes, India is exchanging them for new ones, and also introducing a larger, 2000-rupee note, which are also being given in exchange for the old notes.


The idea in The Curse of Cash of eliminating large notes and not replacing them is not aimed at developing countries, where the share of people without effective access to banking is just too large. In the book I explain how a major part of any plan to phase out large notes must include a significant component for financial inclusion. In the United States, the poor do not really rely heavily on $100 bills (virtually no one in the legal economy does) and as long as smaller bills are around, the phase out of large notes should not be too much of a problem, However, the phaseout of large notes is golden opportunity to advance financial inclusion, in the first instance by giving low income individuals access to free basic debt accounts. The government could use these accounts to make transfers, which would in turn be a major cost saving measure. But in the US, only 8% of the population is unbanked. In Colombia, the number is closer to 50% and, by some accounts, it is near 90% in India. Indeed, the 500 rupee note in India is like the $10 or $20 bill in the US and is widely used by all classes, so India’s maneuver is radically different than my plan. (That said, I appreciate that the challenges are both different and greater, and the long-run potential upside also much higher.)

Indeed, developing countries share some of the same problems and the corruption and counterfeiting problem is often worse. Simply replacing old notes with new ones does have a lot of beneficial effects similar to eliminating large notes. Anyone turning in large amounts of cash still becomes very vulnerable to legal and tax authorities. Indeed that is Modi’s idea. And criminals have to worry that if the government has done this once, it can do it again, making large notes less desirable and less liquid. And replacing notes is also a good way to fight counterfeiting—as The Curse of Cash explains, it is a constant struggle for governments to stay ahead of counterfeiters, as for example in the case of the infamous North Korean $100 supernote.

Will Modi’s plan work? Despite apparent huge holes in the planning (for example, the new notes India is printing are a different size and do not fit the ATM machines), many economists feel it could still have large positive effects in the long-run, shaking up the corruption, tax evasion, and crime that has long crippled the country. But the long-run gains depend on implementation, and it could take years to know how history will view this unprecedented move.


In The Curse of Cash, I argue that it will likely be necessary to have a physical currency into the far distant future, but that society should try to better calibrate the use of cash. What is happening in India is an extremely ambitious step in that direction, of a staggering scale that is immediately affecting 1.2 billion people. The short run costs are unfolding, but the long-run effects on India may well prove more than worth them, but it is very hard to know for sure at this stage.

The long quote is by none other than Rogoff himself on the viability of the Indian drive.

Negative Interest Rates? huh!

Many months ago, Bank of Japan (BoJ) introduced a Quantitative and Qualitative Monetary Easing (QQME) with Negative Interest Rates. Whats the logic behind this other than maybe reducing reserves to induce banks into lending more? Tricky and audacious at the same time. The seven-pager document (hereCaution: pdf) isn’t a rigmarole, but the underlying logic sure is a Rube Goldberg machinic one, and that too in the face of impeccable liquidity management at the operational level at the Bank, where near zero-interest rates amidst growing fiscal deficits were carefully held. When Japan initiated its Quantitative Easing (QE) in the early 2000s, the rationale was to flood banks with enough liquidity to promote private lending leaving them with humongous stocks of reserves and scarcely a risk of liquidity shortage. this was achieved by buying excess amount of Government bonds than would be required to set the interest rate to zero. But, this stimulating package only accomplished a moderate success rate on the performance scale, to say the least. The banks are not reserve constrained in their lending, and thus the only rationale behind the stimulus as a result of negative interest rates would be investment and consumer durable were motivated enough to borrow at lower interest rates that the asset swap (bonds for reserves) generated.

 According to the official communique, QQME with a negative interest rate would achieve the price stability target of 2% at the earliest; Adopt a three-tier-system to map-out outstanding balance of each financial institution’s current account at the bank; Introduce Money Market Operations (MMO) (Caution: pdf) to swell the monetary base by ¥80 trillion annually, and thus go in for more Quantitative Easing; and Adopt a Qualitative Easing goal by exchanging a broad range of public and private assets for reserves. In line with Point 3 on Page 3 of the document linked to above, it is maintained that the BoJ will lower the short-end of the yield curve by slashing its exposit rate on current accounts into negative territory and will exert further downward pressure on interest rates across the entire yield curve, in combination with large-scale purchases of Japanese Government Bonds. This is where Negative Interest Rate (NIR) find itself defined: Imposing tax on banks for holding reserves above certain limits with the BoJ. The logic cuts across smoothly here, for banks will not show readiness to borrow from each other at higher rates, and implying subsequent pushing of longer-maturity rates down. The dressing up logic, however is to address global volatility in markets with a double-edged sword of imposing public tax on private sector to promote exhilarating inflation. With a moderate success the first time QE was taken up, what guarantees bad implications for earnings of financial institutions slipping into the negative territory? In response, BoJ claimed, “overcoming deflation as soon as possible and exiting from the low-interest rate environment lasting for two decades is essential for improving the business conditions for the financial industry.”
Helter-Skelter midstream!!! But, there are more layers to peel to get centric. Okay, what is the three-tier-system about?
Tier-1: pays a +ve 0.1% on Basic Balance covering existing reserves traced on the system from previous QQME.
Tier-2: The Macro-“Add-on” Balance receiving a zero interest, and helping maintain required reserves held by financial institutions subject to Reserve Requirement system.
Tier-3: Policy-Rate Balance with a -ve 0.1%, with provisions of new reserves entering the system, with a tax of 0.1% on the bargain. This is where Tier-3 gets muddled. The logic is to swell reserves notwithstanding the fact that bank lending reserve constrained.
According to Bank of International Settlements’ Unconventional Monetary Policies: an appraisal (here; warning: .pdf file), such unconventional monetary policies are distinguished by central banks actively using its balance sheet to affect directly market prices and conditions beyond a short-term, typically overnight interest rate, and referring to such policies as “balance sheet policies” rather than “interest-rate policies”. Hereby, they obliterate insights understood in the Keynesian period by taking recourse to a decoupling principle via which the central banks remunerates bank reserves relative to the policy rate. Quoting in full,

..key feature of balance sheet policies is that they can be entirely decoupled rom the level of interest rates. Technically, all that is needed is for the central bank to have sufficient instruments at its disposal to neutralise the impact that these policies have on interest rates on any induced expansion of bank reserves. Generally, central banks are in such a position or can gain the necessary means. this “Decoupling Principle” also implies exiting from the current very low, or zero interest rate policies can be done independently of balance sheet policies. 

The principle is congruent with Modern Monetary Theory, or MMT in short, where Central Bank can sell Government debt in order to adjust the quantity of reserves to bring about desired short-term interest rate; or remunerate execs reserve holdings at the policy rate setting the opportunity cost of holding reserves for banks to zero. This then delinks the interest-rate level set by the central bank severing any relation between swelled-up reserves and interest rates. The BIS paper sums this up,

In particular, changes in reserves associated with unconventional monetary policies do not in and of themselves loosen significantly the constraint on bank lending…The preceding discussion casts doubt on two oft-heard propositions concerning the implications of specialness of bank reserves. first, an expansion of bank reserves endows banks with additional resources to extend loans, adding power to balance sheet policy. Second, there is something uniquely inflationary about bank reserves financing. 

This falls in line with MMT’s basis premise that banks reserves are not required to make loans and there is no monetary multiplier mechanism at work. BIS paper then starts hammering the nail in the coffin by invoking the ghosts of past Japanese experiments with QE,

A striking illustration of the tenuous link between excess reserves and bank lending is the experience during the Bank of Japan’s Quantitative Easing policy from 2001-06. Despite significant expansion in excess reserve balances, and the associated increase in base money, during the zero-interest rate policy, lending in the Japanese banking system did not increase robustly.

Japanese banks are not expanding credit as a result of unwillingness to make loans or a lack of reserves. Instead, the reason for slow credit is that businesses have sufficient capital stock to satisfy the demands of a very weak consumption sector and hence do not feel the need to borrow.
Negative interest rates will not alter that, since perhaps holding on to cash as a liquidity measure to transcend time as uncertainty is the future DOES.