Explained: The Printing And Circulation Of Currency, And How Much Will Return

by Swarajya Staff - Dec 18, 2016 02:19 PM +05:30 IST
Explained: The Printing And Circulation Of Currency, And How Much Will ReturnSamples of the new Rs 500 and Rs 2,000 notes are displayed at the Reserve Bank of India (RBI) headquarters in Mumbai. (PUNIT PARANJPE/AFP/Getty Images)
  • Who prints currency notes, and how much?

    How much of the scrapped currency is expected to return?

    We answer these and other questions puzzling people since the scrapping of the old high-denomination notes.

Ever since 9 November, the day after Prime Minister Narendra Modi made his shock demonetisation announcement, there has been furious debate about how much cash is in circulation, how much will come out of bank lockers into bank accounts and how much will never come back and will just become worthless bits of paper.

But how does the Reserve Bank of India (RBI) know how much cash is there floating around, being spent or locked up in lockers? What exactly happens to notes that are not deposited or exchanged after 31 December? Here’s an attempt to answer some questions puzzling people.

Who prints currency notes, and who decides how much to print?

The responsibility of managing the nation’s currency rests with the RBI. Every year, around March or April, the central bank works out the volume and value (the various denominations) of currency to be printed. This is done on the basis of a forecasting model which takes into account, among other things, expected growth in gross domestic product (GDP), likely inflation, seasonal factors, currency lying in its vaults, replacement demand (old notes that come back) and growth of non-cash payments (cheques, card and electronic payments).

An indent is then placed for printing (minting in the case of coins). The currency first goes to the RBI’s vaults across the country, from where they are sent to banks. For areas where the RBI does not have vaults, the currency goes directly from the press/mint to around 4,422 currency chests. These currency chests are set up by banks to store notes and coins on behalf of the RBI. Each currency chest has a certain number of bank branches assigned to it and to whom it distributes the cash.

Records are kept of the value and volume of notes printed or minted, what is sent out to the vaults or currency chests and from there to banks and further to the public.

The notes kept in the RBI vaults is not currency – it has no value. But the notes that go out to banks and then the public is a liability, which the RBI has to honour. That is, if someone presents a note, he has to get the value of the amount indicated on it under the RBI Act. As long as a note does not come back to the RBI, it continues to be a liability.

Is currency in circulation equal to all money in the system?

No. There are different kinds of money – reserve money, broad money, narrow money.

The currency in circulation (which is a component of reserve money) comprises the notes and coins with the public as well as the cash in hand with banks. The RBI has a record of how much currency has gone to the public and the banks and how much comes back to it (usually soiled and damaged coins). It reissues those that it considers fit for circulation and destroys the rest and this amount is netted out.

As of 9 November, the high-denomination notes with the public was Rs 15.44 lakh crore. According to this article in Mint by Niranjan Rajadhyaksha, as of 11 November, the currency in circulation was 80 per cent of reserve money, and 86 per cent of this was in denominations of Rs 500 and Rs 1,000.

How much of these high-denomination notes have been returned, and why is there so much noise about that?

Various estimates are floating around, but the exact figures will be known only in January, since the last date for deposit of old notes with banks ends on 30 December. Then the RBI will have to take stock of what has been deposited with it by banks and other agencies where the notes are being deposited. The response to the second income declaration scheme announced by the government will also have to be seen and factored in.

Meanwhile, there is a storm raging over two issues.

Double counting: The State Bank of India’s economic research division has pointed out that old notes are being collected by banks, post offices as well as urban and rural co-operatives. Post offices and co-operatives deposit the cash lying with them with banks. In the course of the current exercise, it is quite possible that they are individually reporting to the RBI the cash returned to them. But the banks in which they deposit the cash are also reporting it. Hence, it is argued, the likelihood of double counting of high-value notes returned. The finance ministry has also taken note of these concerns and has said it will keep this in mind.

How much money will come back into the system: Some economists said it would be safe to assume that 20 per cent of the Rs 15.44 lakh crore is black money. This money (which works out to Rs 3 lakh crore), they said, would never be returned to banks because the people holding them would not want to come on to the radar of tax authorities.

This means, these economists argue, the liabilities of the RBI would shrink by Rs 3 lakh crore (since it would not have to honour the notes that have not been returned). When the liabilities shrink, the share of assets on the RBI’s balance sheet will increase, and this will enable it to pay a higher dividend to the government. This is the windfall to the government that was being spoken about.

However, RBI governor Urjit Patel clarified at the press conference after the monetary policy on 7 December that the central bank’s liability will not reduce just because notes do not come back into the system. “The withdrawal of legal tender status does not extinguish anything from the RBI’s balance sheet. There is no question of special dividend just by withdrawal of legal tender character.”

In any case, one will have to wait till January to know how much of the high-denomination notes that were in circulation as of 9 November do get returned.

But do not forget that while depositing of old Rs 500 and Rs 1,000 notes in banks ends on 30 December, these can still be deposited at offices of the RBI till 31 March. The RBI will continue to honour these notes; that is, exchange it for new notes. So its liability will not get reduced, unless the government expressly says the old notes cannot be redeemed any more. It is then that the currency will be actually demonetised. Right now, going strictly by the rule book, it has only been de-legalised.

But, yes, someone with a huge hoard of old notes is clearly not going to take it to the RBI’s counters. The taxman will have to be dealt with.

According to Datta Kale, retired chief general manager of the RBI, it is only after 31 March that the government and the RBI will have to take stock of how much of the old notes have returned, by how much has the RBI’s liability reduced, work out the costs involved in the demonetisation exercise and then decide about the dividend to be paid by the RBI.

If all the money comes back into the system via banks, does that mean there was no black money in the first place?

Well, the black money doesn’t become white merely by being deposited in bank accounts. Yes, it is true that those holding black money have found ways to launder it – depositing it in small amounts in bank accounts of different people, using Jan Dhan Yojana accounts, buying large-value goods and so on. But large deposits that arouse the taxman’s suspicion will still have to be explained. If the explanations fail to satisfy the taxman, penalty will have to be paid.

But even if the explanation is found to be satisfactory, tax will still have to be paid. And since black money is really money on which tax has not been paid, this does serve the purpose. It’s just that black money holders who have been smart in laundering their money will get away with just, say, 30 per cent tax, while the ones who had just too much to launder may have to pay a hefty penalty.

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