Two days after Prime Minister Narendra Modi's bombshell announcement on demonetisation on 8 November, the Reserve Bank of India put out a routine bulletin of data. Only this time, the numbers were explosive. Bank deposits--money deposited by the public in banks--had seen a sudden spike in September, the likes of which has not been seen in at least six years.
RBI data collated by HuffPost India shows that aggregate deposits with all scheduled commercial banks grew by Rs3.67 lakh crore between August and September. In the last six years, there has only been one instance--February 2013 to March 2013--with a bigger increase in absolute terms. March deposits, however, tend to be high, being the end of the financial year. In the last six years, September increases were on average Rs91,500 crore, for reference.
Economics writer Vivek Kaul used data from the Centre for Monitoring of the Indian Economy to find that the quarterly increase in demand deposits (most commonly checking and savings accounts) and time deposits (for example, fixed deposits) between the end of June 2016 and September 2016 was the highest in absolute terms since March 2002.
Moreover, the spike occurred in one fortnight--significantly, the latter fortnight--rather than in one month, RBI data shows. Aggregate bank deposits declined in the first half of September and then shot up by Rs 3.55 lakh crore in the last 15 days of the month. This was the highest fortnightly increase in both absolute and percentage terms in six years of RBI data.
All of which is to say that something unusual, and thusfar unexplained, happened in September 2016.
Final data for October 2016 is as yet unavailable.
This is significant because of the possibility this spike raises of people being pre-warned of the upcoming demonetisation and deciding to deposit large amounts of cash before it kicked in. The peak occurring in the second half of the month, closer to the demonetisation announcement, makes it particularly confounding.
Finance Minister Arun Jaitley dismissed these allegations at a press conference on November 12, saying that the September spike was explained by payouts of the Seventh Pay Commission. However the maximum payout including arrears is no more than Rs 1 lakh crore. So it can only partly explain the spike.
Another explanation reported by some newspapers came from the State Bank of India's Chief Economist Soumya Kanti Ghosh who in a research paper hypothesised that Rs 85,000 crore out of the spike was explained by the government's Income Disclosure Scheme that required declarations of unaccounted wealth to made by the end of September 2016. This could have prompted people with large amounts of cash to deposit it before they made their disclosures. A similar scheme, Ghosh said, was rolled out in 1997.
However our examination of 1997 data shows that there was no significant spike in deposits in December 1997 when the scheme ended--0.69% between December November 1997 and December 1997 (as opposed to 3.77% in September 2016). Moreover, a chief economist with a private bank, who did not want to be quoted, said that since September 30, 2016 was the final date for declarations and not deposits, banks had not been anticipating a spike until the end of the year.
Two additional reasons could be the anticipation of a rate cut in the October review and a fall in the Consumer Price Index, said Shalini Mittal, research associate in the Macro/Finance Group at the National Institute of Public Finance and Policy. "Inflation fell to a five-month low of 5.05 per cent in August, from a nearly two-year high of 6.07 per cent in July, causing real interest rate to rise and making holding cash more costly. This encouraged more deposits," she said. It would be very hard to pinpoint how much of the increase is explained by each of these events without data, but it is likely that most of it is accounted by these events, she said. "I'd say that the spike in deposits reflects economic agents in India adapting to a new low-inflation environment with an inflation-targeting central bank," she said.
The private bank chief economist said that all of the explanations on record did not explain such a record spike, but did not want to be quoted. "At the moment, the talk among us is that something suspicious seems to have taken place," he said.
Correction: A previous version of this article incorrectly stated the length of time between the end of September and the demonetisation announcement, which happened on 8 November.