Demonetisation effect: RBI liability remains for old notes

From Nov 10 to Dec 5, the central bank says it supplied to the public bank notes of various denominations worth Rs 3.81 lakh cr

Ruling out any immediate bounty from demonetisation, the Reserve Bank of India (RBI) said on Wednesday that the old notes carry a liability as long as only their legal tender character is withdrawn.

The latter alone does not extinguish any aspect of RBI’s balance sheet. Therefore, there is no question of special dividend as of now, RBI governor Urjit Patel said to queries on benefits to the government from the decision.

There has been speculation that the old currency notes (Rs 500 and Rs 1,000) which do not come back would mean no liability to pay for these and would be knocked out from the liability side of RBI’s account books. As a consequence, the asset would turn into profit, which could be transferred as a dividend to the government as 100 per cent owner of the central bank.

On the amounts received by banks as deposits from the old notes, RBI Deputy Governor R Gandhi said the former had got about Rs 11.55 lakh crore. This flow into bank vaults has created a severe currency shortage. Gandhi said RBI and central government-run note presses are working to their full capacity. And, that it was working to ensure the notes reach every part of the country. 

From November 10 to December 5, the central bank says it supplied to the public bank notes of various denominations worth Rs 3.81 lakh crore.

The motivation for demonetisation, said RBI, was to deal with the problem of high quality counterfeit notes in these denominations and unearth undisclosed money that might be held in cash. The decision was after detailed deliberations, and taken while conscious of the difficulties the public at large could face. The effort is to minimise and mitigate these, Gandhi said.

As regards lower denomination notes (Rs 100, Rs 50, Rs 20 and Rs 10), RBI has supplied 19.1 billion pieces in this period. This is more than what it had supplied to the public in all of the past three years, the deputy governor said.

There is adequate supply of notes and hoarding of notes helps nobody’s cause. The public should switch to digital payment modes, he added. There are adequate safeguards and there is an increasing acceptability of this mode of payment by a large number of recipients.

Showing the effect of demonetisation, currency in circulation contracted for a fourth week in a row. It declined by 11.2 per cent (Rs 1.33 lakh crore) to Rs 10.54 lakh crore in the week ended December 2. The fall in the previous week (November 25) was large at 16.8 per cent (Rs 2.3 lakh crore), according to RBI data.