India continues to stagger from bad to worse followinhg Modi's demonetization. With just 35% of ATMs nationwide operational, Goldman warns the shortage of cash continues to incentivize the use of alternate payments, including extension of informal credit and a return to barter systems. Addtionally, the slowdown in activity is dramatically reflected in lower tax collections and discounts offered by luxury car companies.

Goldman Sachs recently introduced their India 'De-monetization dashboard' in which they track the progress of the Indian government's recent currency reform announced on November 8 via a variety of high-frequency data, including money supply, credit/deposit, interest rates, physical asset premia, real economic activity, price indicators and capital flows.

This week’s update shows that cash availability at ATMs is still low. On real economic activity, there were no major data releases this week. However, PMIs and auto sales data released last week suggested a significant slowdown in activity. Separately, anecdotal evidence suggested continued weakness in activity as shown in the lower indirect tax collections and various discounts given by luxury car companies.

Monetary infrastructure

According to Livemint, 95% of ATMs (out of 200,000 in the country) have been re-calibrated to accept new notes but only 35% of the re-calibrated ATMs are operational. Banks are preferring to make cash available in their own branches instead of making cash available at ATMs. Daily data from ATMs in the four key metro cities – namely Bengaluru, Delhi, Kolkata and Mumbai – show that people are still facing a ‘cash crunch’ in about half of the ATMs. The shortage of cash continues to incentivize the use of alternate payments including electronic payment systems, extension of informal credit and a return to barter systems. The government has further announced various measures to promote digital and non-cash transactions including discounts on digital purchase of fuel, suburban train tickets, and service tax exemptions on transaction charges up to INR 2000 on December 8.



Exhibit 1: Shortage of cash in ATMs continues

Source: CashNoCash, Goldman Sachs Global Investment Research



Exhibit 2: Still very elevated search interest for retailers accepting electronic payment

Trends in Google searches for key financial terms in India

Source: Google, Goldman Sachs Global Investment Research

Real activity indicators

On real activity, no major data was released this week. However, last week, India's Nikkei Markit manufacturing PMI moderated in November after rising to a 22-month high in October (Exhibit 3). The weakness was across the board, suggesting softening in manufacturing activity post the de-monetization announcement on November 8. The Nikkei Markit services PMI also dropped sharply in November driven by a significant decline in new business, also indicating the potential impact of the cash shortage.

Separately, industry-wide November auto sales (Exhibit 4) showed commercial vehicle sales declined by over 18% mom s.a., car sales declined by 4% mom s.a. and two-wheeler sales dropped by 15% mom s.a. Furthermore, registrations of motor vehicle have fallen since November 2016.

Exhibit 3: India's composite PMI declined sharply in November led by weak services PMI

Source: Haver Analytics, Nikkei Markit





Exhibit 4: Auto sales contracted sharply in November

Source: CEIC, Company data, Goldman Sachs Global Investment Research



Exhibit 5: Motor vehicle registrations have fallen

(December data only partial month)

Source: Road Transport Office, Goldman Sachs Global Investment Research





The latest anecdotal evidence (Exhibit 6) suggests continued weakness in activity during the fourth week post announcement of de-monetization. The slowdown in activity is reflected in lower tax collections and discounts offered by luxury car companies.

Exhibit 6: Real activity anecdotal evidence

Source: Live Mint, The Economic Times, Times of India, Business Standard, Goldman Sachs Global Investment Research

Monetary and financial indicators

Money supply

Reserve money expanded by 0.5% yoy as of the week ending December 2, 2016 after a decline of 16.8% yoy the previous week. This was mainly driven by a INR4.7 trillion increase in bankers' deposits with the RBI (+128.4%yoy) post the temporary increase in Cash Reserve Ratio (CRR) to absorb excess liquidity in the system on November 26 (Exhibit 7). This increase in CRR will be withdrawn from December 10 as announced by the RBI. The central bank also mentioned that they have distributed INR 4 trillion of new high denomination notes so far.

Trends in hard assets premia

Domestic gold and silver premia, as measured by the difference between USD-equivalent domestic prices and global prices, appear to have normalized after an initial spike. Bitcoin premia (we calculate this as the difference between the price of Bitcoin on India exchanges and those abroad) also moderated somewhat this week (Exhibit 15).



Exhibit 15: Hard assets premia somewhat normalised four weeks post announcement

Source: CEIC, Haver Analytics, Bloomberg, Unocoin, Goldman Sachs Global Investment Research





Exhibit 16: Google Trends on gold prices have normalised while Bitcoin stayed elevated

Trends in Google searches for key physical asset words

Source: Google, Goldman Sachs Global Investment Research

