Demonetisation: No 'windfall gain' deploying anytime soon

With the demonetisation of Rs 500 and Rs 1,000 notes, some Rs 14 lakh cr worth went out of circulation

As the Reserve Bank of India continues printing cash to replace demonetised notes, any unclaimed amount can theoretically be claimed as a windfall gain to the government. In practice, though, deploying such gains immediately will cause disruption in the financial system.

RBI will have to take a long-term view on how to deploy any such gains, whether by infusing into the banking system or paying the government through dividends. The central bank and the government have yet to calculate how much that gain will be, senior officials have told Business Standard.

With the demonetisation of Rs 500 and Rs 1,000 notes, some Rs 14 lakh crore worth went out of circulation. RBI is printing new notes of Rs 500 and Rs 2,000 denomination. However, for a number of reasons, including that a lot of the notes withdrawn were counterfeit, a certain amount of notes will be unclaimed. That portion will be a gain to the Reserve Bank.

"It is true that there will be a windfall gain, theoretically. Practically, it would have huge repercussions on liquidity if you suck out money from one market and put it into another. RBI might keep some of the unclaimed legal tender to infuse in money markets," a government official said.

A senior finance ministry official is said to have told investors earlier this week that the Centre expected around Rs 4 lakh crore worth of currency to be unclaimed. And, that it would not be a good idea for the government to use this money to cut tax as it would be a one-time accrual, not income but wealth. The money, should the government decide, can be used for bank recapitalisation and for infrastructure spending, the person is believed to have said.

"RBI will have to see how to manage this money. Obviously, there will be gains; that needs to be deployed in a calibrated manner. One obvious way is capital infusion for banks. Some amount might come to the government in the form of dividend by RBI. All this will have to decided once we know how much amount remains unclaimed from the notes that are reprinted," said the first official quoted earlier.

There was no question, though, of any of that being used to finance this year's fiscal deficit of 3.5 per cent of gross domestic product (GDP), the person said. "It has to be a long-term move. Short-term utilisation will lead to disruption in the monetary system."

At a conference in Singapore, former RBI governor D Subbarao has said any move by the government to treat unclaimed or un-surrendered cash as profit will be "ill-advised". At a banking conference, he said by law the central bank has to transfer all its profit to the government.

"If RBI treats this as a profit, and the Centre demands that this be transferred to it, and they use this to play Robin Hood or to recapitalise the banks, or for whatever other purposes, this will send out the wrong message. I don't believe this is the intention of the current government but if they were to do such a thing, it will be highly ill-advised," he is quoted as having said.