Cash not returned will not be dividend for govt, says Patel

POLICY REVIEW But RBI governor mum on the amount of demonetised currency that will come back into the system

MUMBAI: RBI governor Urjit Patel on Wednesday said the central bank will not pass on the amount of unreturned cash as dividend to the government, since the cancellation of old notes did not change of the RBI’s balance sheet.

“There is no such plan,” Patel told reporters during a press conference after the central bank’s monetary policy review. “Actually the withdrawal of legal tender characteristic does not extinguish any of the RBI’s balance sheets, and therefore is no implication on the balance sheet as of now... So that question does not arise as of now.”

He, however, remained noncommittal on whether the entire demonetised currency would come into the system. Demonetisation does have costs in the short term, but benefits in the medium and long term include more transparency, accountability and better security to fight terrorist financing, counterfeit notes and black money, he said.

“The costs are what we are witnessing now in terms of inconvenience we are all aware of. The benefits are in the medium and long term…We will have more transparency, in terms of fiscal and tax compliance, we will be at a better place, our public finances could improve and very important is the collateral benefit — the cost of digitisation that is taking place. As more digitisation takes place, the total quantum of paper currency that we need from the base level should come down.”

The Reserve Bank of India (RBI) on Wednesday said around ₹11.55 lakh crore has come back into the system in the form of old notes till date. Taking into Amount that has come back into the banking system through old notes Cash supplied to banks between Nov 10 and Dec The repo rate, the rate at which banks borrow from RBI, unchanged at 6.25% Rollback of 100% of incremental deposits (cash reserve ratio) from Dec 10. The central bank had raised it to absorb the surplus liquidity with banks after demonetisation No dividend to government from cancelled amount of old notes Demonetisation to result in short-run disruptions in cash-intensive sectors like retail, hotel, transportation Growth forecast cut to 7.1%, from 7.6% for 2016-17 Inflation target at 5% for March 2017, but volatility in crude oil prices, surge in financial markets could play spoilsport

account the government’s estimate that ₹14 lakh crore worth of old notes were in circulation before December 8 (when the government announced its demonetisation drive), ₹2.45 lakh crore is yet to come back into the system.

The RBI’s stance on dividend underscores its autonomy in deciding how it would treat the cancelled amount, as it was expected that the government would be paid dividend.

In fact, brokerages and Pieces of currency notes supplied to banks, more than what RBI has supplied in the last three years

research houses had estimated that around ₹3 lakh crore would not come back — people would not deposit them due to fear of criminal prosecution — after December 30 (the last date for returning old notes to banks).

Since this cancellation would have reduced the RBI’s liabilities to that extent, it would imply a surplus, and banking experts had said that the amount could be transferred to the government to boost its non-tax revenue.