Pre-demonetisation enigma of big withdrawals after record deposits

Two very unusual events preceded Prime Minister Narendra Modi’s famous demonetisation announcement of ₹500 and ₹1,000 currency notes, at 8 pm on November 8, 2016. As per the data in the Reserve Bank of India’s (RBI) Weekly Statistical Supplement for October 2016, which was released on November 11, there were huge cash withdrawals in October to the tune of over ₹2 lakh crore.

Abnormally high withdrawals in October

This was preceded by a record surge in deposits during the second half of September, 2016. According to the data in the RBI's monthly bulletins, as on September 30, the total deposits had gone up to ₹109.39 lakh crore* from ₹105.14 crore on September 16. This was an increase of a whopping ₹4.25 lakh crore deposits in a fortnight! (For the month till August 19, the total deposits were at ₹104.49 lakh crore.) Subsequently, the total deposits for October, 2016 had fallen to ₹107 lakh crore. That is, withdrawals of over ₹2 lakh crore were made this October.

“It is indeed unusual for such a phenomenon to happen,” says Pronab Sen, who had held the position as the first Chief Statistician of India and currently is the Country Director for International Growth Centre.

In fact, if one were to check the data from May 2016 onwards, there have only been marginal increases in deposits till August, below one lakh crore rupees. It was only in October that the deposits dipped so steeply, when compared on a month-on-month basis. (Total deposits have been calculated by adding up the money deposited by public in banks to the time deposits in banks).

"Going by the past trends, decline in deposits by such a large extent in October is surprising and creates a doubt," says an economist, whose organisation restricts him from making public statements.

"No normal transaction can account for changes of this dimension in both directions," adds Sen.

Conundrum of huge September deposits

A TV channel's report had pointed out that some public sector banks such as SBI, Punjab National Bank, Bank of India and others had witnessed a sudden growth in deposits in the July to September quarter this year. This was in the backdrop of most indices showing that the economy was not doing so  well.

When prodded by reporters on the sudden hike in bank deposits in the July to September quarter, Finance Minister Arun Jaitley clarified that the spike was only in the month of September, and said it was largely due to the 7th Pay Commission arrears payout for August to the nearly one crore central government employees and pensioners. That explanation doesn't really add up as the Pay Commission arrears were only about ₹35,000 crore. Incidentally, RBI Governor Urjit Patel assumed office on September 4. Was his entry a reason for some extraordinary deposit bull-run? That, of course, would be a stretch of imagination.

Let's then consider other possibilities. There was the Income Declaration Scheme (the black money scheme) that ended on September 30, 2016 in which the government could collect 45% of the over ₹65,000 crore amount declared. The declarant, however, would have to pay the due amount in three instalments with the first one to be paid by November 2016.  Another possible reason could be unusual Income Tax payments. And, there could have been possible subsidy payments such as that on fertilisers and so forth. Still, all these don't really explain the over ₹4 lakh crore hike in deposits.
Could this then have been due to some kind of a seasonal phenomenon? It's usual to see an accumulation of cash ahead of the festive season. However, RBI data shows that in 2014 and 2015, the substantial increase in deposits was seen only in October, certainly not in September. And the deposits didn't see any major decline subsequently in November 2014 or 2015.

So, what is behind this unusual behaviour of the depositors in September this year? Does this point to some people getting insider information in advance of the demonetisation move? Delhi Chief Minister Arvind Kejriwal has been crying foul, alleging that BJP had tipped off its "friends" about the demonetisation move much before PM Narendra Modi's announcement. He demands its immediate rollback.

The government, on expected lines, rejects that allegation and officials confide that only a handful of people were aware of the plan till the very end. In fact, some news reports had said that almost the entire Union Cabinet was in the dark till the final moments. Interestingly, however, the Hindi daily Dainik Jagran had broken the story of impending demonetisation of ₹500 and ₹1,000 notes on October 27. Another Rajkot-based Gujarati daily, Akila, also carries a story on April 1 this year saying that ₹500 and ₹1,000 currency notes would be discontinued. The Editor, however, clarified saying it was an "April Fool prank". Hopefully, it was just a prank that uncannily turned out to be prophetic.

Otherwise, if some selective people did get a whiff of the demonetisation plan and took preemptive steps, then the joke would be on the millions of honest citizens who have had to stand in long serpentine queues to withdraw just a couple of thousand rupees of their hard-earned 'white' money.

Pronab Sen says it could either be a major typographical error in the RBI’s statistics or transactions have taken place which need very, very close scrutiny by both the regulator and the Enforcement Directorate.

Perhaps there's a simple, innocuous explanation for this wild September and October swing of massive deposits followed by large withdrawals. The RBI and the Finance Ministry should clear the air on this immediately.

* One lakh crore = 1,00,000 × 1,00,00,000, or 10,00,00,00,00,000