Govt to amend RBI Act to annul old Rs 500, 1,000 notes

The government expects Rs 13 lakh crore to come back to the banking system

The government is likely to amend the Reserve Bank of India (RBI) Act to extinguish the validity of Rs 500 and Rs 1,000 printed before November 9 and a reference to this effect would be made in the upcoming Budget.

As part of the demonetisation process, there would be a law to make Rs 500 and Rs 1000 notes invalid and it can be made effective from March 31, sources said.

"In 1978, when the currency was banned, the law to annul the validity came ahead. This time the government acted under 26 (2)," sources said.

As per RBI Act Section 26 (2), the central government, on the recommendation of the Central Board of RBI, may by notification in the Gazette of India, declare that, with effect from such date as may be specified in the notification, any series of bank notes of any denomination shall cease to be legal tender.

Asked about the amount of money which did not get into the system, sources said, it would add to bottom line of the RBI and it would be in a position to pay the government in the form of higher dividend or special dividend.

Banks have received Rs 12 lakh crore demonetised currency notes as against Rs 15.5 lakh crore. The government expects Rs 13 lakh crore to come back to banking system.

Higher dividend from the RBI due to cancellation of Rs 500 and Rs 1,000 notes may not be applicable until the RBI law is amended.

Last week, Reserve Bank Governor Urjit Patel had said it would not have any automatic impact on the central bank's balance sheet as per the existing law.

"Actually, the withdrawal of legal tender characteristics status does not extinguish any of RBI's balance sheet. Therefore, there is no implication on the balance sheet as of now. The question of a special dividend automatically does not arise as of now," Patel had said.

RBI has issued currency notes worth over Rs 4.27 lakh crore to public through banks and ATMs following the demonetisation of old high-value bills.

Consequent to the announcement of the withdrawal of legal tender status of banknotes of Rs 500 and Rs 1,000 notes from the midnight of November 8, 2016, the central bank made arrangements for exchange and/or deposit of such notes.

Long queues for cash withdrawal have been witnessed outside banks and ATMs all over the country since November 10. The banks were kept closed on November 9, the day demonetisation came into effect.