Rs 69,000 Cr in Old Notes May Be Left Behind, RBI Data Suggests

The RBI has cautioned against using such estimates and has said that the final figures will be released soon.

Data released by the Reserve Bank of India on Tuesday shows that the value of notes in circulation at the end of December was at roughly half the level that was reported ahead of the government’s demonetisation decision.

The data, which can also be used to calculate the amount of old currency deposited in banks so far, suggests that less than Rs 1 lakh crore in banned currency notes may have remained in the system after the deadline to deposit old notes expired. To be sure, the RBI has cautioned against using such estimates and says that final figures will be released after accounting entries are reconciled with physical cash balances.

Extent of Cash Crunch Post 30 December

According to the RBI’s monthly bulletin for January, the value of notes in circulation stood at Rs 9.14 lakh crore as on 30 December. This is 52 percent of the Rs 17.54 lakh crore in notes in circulation as on 28 October.

The data shows that currency continues to be in short supply two months after the demonetisation decision was announced. This comes as no surprise. In response to an RTI query by activist Anil Galgali, the central bank revealed that only Rs 4.94 lakh crore in Rs 2,000 notes had been printed as on 8 November and no new notes of Rs 500 had been printed.

Bankers and economists have predicted that it will take until about March to replenish a bulk of the cash supply. State Bank of India Chief Economic Adviser, Soumya Kanti Ghosh, said on 19 December that over 78 percent of the currency could be back in the system by the end of February.

By the end of February, 78- 88 percent of the currency could be back in the system under the best case scenario in terms of an optimal currency distribution (more small denomination notes). Clearly, it seems that within next two months things would be pretty close to normal. Interestingly, this number can go up to 98 percent if we disregard the currency composition. 

Soumya Kanti Ghosh, Chief Economic Adviser, State Bank of India

How Much Old Currency Has Returned?

The more debatable question is how much of the old currency has returned to RBI.

As the bulletin shows, notes in circulation stood at Rs 9.14 lakh crore as on December 30. This includes old notes which remained valid (notes with denomination up to Rs 100), new notes of Rs 500 and Rs 2,000 added to the system and any remaining demonetised notes.

• On 28 October, the value of notes in circulation stood at Rs 17.54 lakh crore. Of this, 86 percent or Rs 15.08 lakh crore was in Rs 500 and Rs 1,000 notes.
• This meant that Rs 2.46 lakh crore in valid notes remained in circulation
• In addition, the RBI has said that banknotes worth Rs 5.9 lakh crore had been issued to the public between 10 November and 19 December
• This suggests that about Rs 8.36 lakh crore of the Rs 9.14 lakh crore in notes in circulation was in the form of valid currency
• Allowing for some margin of error, the data shows that only Rs 69,000 crore in old currency was left behind as on 30 December

This number could be marginally lower if the RBI pushed an additional amount of new currency into the system between 19 December and 30 December. It could also be marginally higher if there is some double counting between the valid currency that remained in the system and the currency put out by banks between 19 December and 30 December.

This method of calculating old currency remaining in the system was first used by Financial Express.

The numbers are broadly in-line with estimates put out by some economists.

In a note dated 4 January, Indranil Sen Gupta, chief India economist at Bank of America-Merrill Lynch said he cut his estimate of a possible special dividend from the RBI to the government to Rs 50,000 crore from about Rs 95,000 crore earlier as a bulk of the old currency has been deposited or exchanged.

The RBI has, however, cautioned against using such estimates. In a press release on 5 January, the RBI said that accounting entries at currency chests are being reconciled with physical cash balances to “eliminate accounting errors/possible double counts etc”.

RBI has already initiated this process and till this is completed any estimate may not indicate the actual numbers of the SBNs (specified bank notes) that have been returned. RBI is taking all steps to complete the process expeditiously so as to release firm figures of SBNs received at an early date.

RBI statement

(This article was first published on BloombergQuint.)