BackFix the money pipe, not the price of money
But reducing interest ratesthe price of moneywill have little impact until the quantity of currency is fully replaced
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What the demonetization of high-value currency notes has done is wipe out 86% of the currency in circulation, which is essentially a massive reduction in supply of money with the public. This has had a deflationary shock on the economy.
But reducing interest rates—the price of money—will have little impact until the quantity of currency is fully replaced. The accompanying chart shows how currency with the public has fallen and these have flooded banks in the form of deposits. The figures will amplify further in subsequent fortnights.
The fall in currency with the public is the reason behind a drop in demand for goods, lower consumer spending and therefore lower growth in economic activity. But since banks are inundated with deposits, the price of money (interest rates) in financial markets has gone down. Money market rates and bond yields have declined. A policy rate cut will only increase this distortion. The only solution to put growth back on track is to replenish currency rather than cut rates.
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