RBI and economics of demonetisation
NEWDELHI: While the jury is out on the costs and benefits of demonetisation, for the Reserve Bank of India (RBI) at least, the note ban was one of the key reasons for lower profits. To that limited extent, the government also had to bear the brunt in the form of the lower dividend it received from the central bank. RBI paid only ₹30,663 crore as dividend compared to ₹65,880 crore a year ago. Here’s how the math works: RBI’s income for its financial year ending 30 June fell 23.56% to ₹61,818 crore. It’s income fell because of a couple of reasons. One, the central bank’s income from foreign sources fell 35.3% because of the appreciation of the rupee and the lower yield on foreign currency assets. This was lower at 0.8% in 2016-17 compared to 1.3% a year earlier.
Two, net income from domestic sources fell 17.11%. This was largely because RBI had to pay interest of ₹17,426 crore as it mopped up excess liquidity in the banking system after people rushed to deposit invalidated curThe rency notes at banks. The previous year, the RBI earned an interest of ₹506 crore in its liquidity management operations.
On the expenditure side, the central bank spent ₹7,965 crore on printing currency notes in 2016-17, more than double the ₹3,420 crore spent a year ago. In its efforts to quickly remonetise the economy, RBI issued 29 billion currency note pieces in 2016-17 compared to 21.2 billion a year earlier.
“The upsurge in expenditure during the year was on account of change in the production plan of printing presses due to the introduction of new design notes in higher denominations as well as the requirement of larger volume of notes for replacement of the demonetised currency,” the central bank said in it annual report. “To ensure availability of banknotes across the country at the shortest possible time subsequent to the demonetisation, banknotes had to be frequently air-lifted from the presses.”
second large expense was the ₹13,100 crore provision that the central bank made towards it contingency fund. This fund is for meeting unexpected and unforeseen requirements such as a depreciation in the value of securities, risks arising out of monetary/exchange rate policy operations, systemic risks etc.
The RBI doesn’t say exactly why it topped up the fund. However, in 2013-2014, a committee headed by YH Malegam had suggested that the central bank can transfer its entire surplus to the government, without allocating anything to its various reserve funds, for three years because it had adequate reserve funds. That three-year period ended last year. Moreover, the contingency fund and asset development fund put together make up only 7.6% of the RBI balance sheet now compared to 10.1% in 2013.
In the final analysis, putting it simplistically, RBI’s extra interest expenses of ₹17,426 crore, the extra printing cost of ₹4,545 crore and provision of ₹13,100 crore together make up just about the ₹35,217 crore decrease in net profit.