RBI Annual Report: 99% Of Demonetised Currency Returned
People showing their money after withdrawing from an ATM after a long queue in Patna on Sunday. (Source: PTI)

RBI Annual Report: 99% Of Demonetised Currency Returned

Indian citizens deposited almost all the currency that was scrapped during demonetisation, shows data released by the Reserve Bank of India (RBI) as part of its annual report. The government’s abrupt decision to withdraw legal tender status for Rs 500 and Rs 1000 notes, announced on November 8 2016, was intended to extinguish so-called black money from the economy and curtail the problem of counterfeit notes. The fact that almost all the scrapped currency has been returned puts paid to both those arguments.

According to the report, specified bank notes (SBNs), or notes that were demonetised, worth Rs 15.28 lakh crore had been received as of June 30, 2017. When demonetisation was announced, the currency in circulation stood at Rs 17.97 lakh crore. 86 percent of this, or Rs 15.45 lakh crore, was rendered invalid by demonetisation.

RBI Annual Report: 99% Of Demonetised Currency Returned

The RBI, however, said that this data was still provisional.

Till such time these notes are processed by the Reserve Bank for their numerical accuracy and authenticity, only an estimation of SBNs received back is possible. Subject to future corrections based on verification process when completed, the estimated value of SBNs received as on June 30, 2017 is Rs 15.28 lakh crore.
RBI Annual Report

Does this mean that demonetisation has been a failure?

To define success or failure of a policy, you have to define a metric, said Ajit Ranade, chief economist at the Aditya Birla Group. In the case of demonetisation, there was no single objective, he said. In the initial days, the government said that demonetisation had been announced to tackle black money, counterfeit currency and terror financing. Later, the objective shifted towards pushing the economy away from cash transactions and increasing the tax base. “One can say there has been some limited success in each of these,” said Ranade. He added that, to him, the standout feature of demonetisation was the ability of the economy and the population to withstand an event as disruptive as this. Also demonetisation was in keeping with the broader objective towards greater formalisation of the economy.

While growth in the economy did slow in the aftermath of demonetisation, the impact was far lower than feared. The Indian economy grew at 6.1 percent in the fourth quarter of 2016-17, down from 7 percent in the previous quarter.

Detailing the impact of demonetisation on currency composition, the RBI said that the value of banknotes in circulation declined by 20.2 percent over the year to Rs 13.1 lakh crore as of end-March 2017. The volume of banknotes, however, increased by 11.1 percent, mainly due to higher infusion of banknotes of lower denomination in circulation following the demonetisation.

  • In value terms, the share of Rs 500 and above banknotes stood at 73.4 percent compared to 86.4 percent before demonetisation
  • The share of Rs 2,000 banknotes in the total value of banknotes in circulation was 50.2 percent at end-March 2017

The RBI’s Annual Accounts

The RBI's balance sheet increased by 1.88 percent in the year ended June 30, 2017, showed the report.

  • RBI's income for the year decreased by 23.56 percent
  • RBI's expenditure for the year increased by 107.84 percent
  • RBI had a surplus of Rs 30,659 crore during the year
The increase on the asset side was due to increase in foreign investments and domestic investments by 2.70 percent and 7.45 percent, respectively, and capital contribution to the subsidiaries of the Reserve Bank. On the liability side, the increase was mainly due to increase in Deposits by 76.96 percent
RBI Annual Report 2016-17

Factors that impacted the RBI’s balance sheet during the year included the need for more intervention due to a surge in liquidity post demonetisation. As deposits came in and liquidity surged, the RBI sucked out this excess liquidity through tools such as reverse repo operations. The central bank pays an interest to banks on the amount that they park with it through such a window.

The RBI also incurred higher costs on printing currency.

Expenditure on currency printing rose to Rs 7,965 crore in 2016-17 compared to Rs 3,420 crore in 2015-16.

No Special Dividend

The data revealed as part of the annual report also implies that the RBI will not be in a position to pay any special dividend to the government. Some economists had argued that if a large chunk of demonetised currency does not return to the system, those liabilities would be extinguished from the RBI’s balancesheet. This, in turn, would allow the RBI to transfer a similar amount of assets to the government in the form of a special dividend.

This is unlikely to happen now.

For 2015-16, the RBI transferred Rs 30,659 crore to the government in the form of dividend, nearly half of the Rs 65,876 crore paid out in the previous year.

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