Currency conundrum
ADVOCATE KSK Prasad a former banker mailed me this:
Amid the unending queues before the Banks and ATMS even after 13 days of demonetisation of Rs.500 and Rs. 1000 denomination, RBI vide their press release dt 21st Nov 2016 has released the figures of Cash deposits and withdrawals at the banks since Nov 10th to Nov 18th 2016. An amount of Rs. 5,11,565 Crores is deposited by the public, 33,006 Crores is surrendered to the bank for exchange with new notes. The amount of cash withdrawn in new currency amounted to Rs.1,03,316 Crores. Coupled with the amount of Rs. 33,006 Crores exchanged with new currency notes, an amount of Rs. 1,36,322 Crores is now in circulation perhaps mostly in 2000 note denomination, which has found few takers in the market on account of absence of smaller denomination notes of Rs.1000 and below in the circulation.
As per RBI statistics, the money in circulation is Rs. 17,97,460 Lakh Crores as on 4th Nov 2016. Out of the above it was estimated that 86% of it is held in the form of Rs.500 and Rs.1,000 denomination which on a rough estimate amounts to Rs. 15,45,000 Lakh Crores, which was withdrawn on Nov 8th 2016.
On Nov 17th 2016, RBI issued a press release clarifying that sufficient supply of notes is available consequent upon increased production (which started nearly two months ago) and requested the public not to get panic and hoard the cash. Curiously, the press release is silent on the quantum and value of currency released to banks from Nov 10th 2016 onwards in the form of new denomination of Rs.2000 and Rs.500 notes. It is gathered from market sources that Rs.500 denomination is not released uniformly across the country as on today, as many banks have reported that they are yet to receive the 500 denomination into their currency chests as on 21 st Nov 2016.
Now coming to statistics released today, if public withdrawals amounted to Rs. 1,36,322 (Rs. 1,03,316 Crores withdrawn plus Rs.33,006 Crores exchanged) as on Nov 18th 2016 most of which is in the form of new currency released into the market. Coupled with the amount held as balances held in bank branches (2,00,000 branches with an average cash balance of Rs.7.00 Lakhs per branch) the money in circulation amounts to Rs 1.50 Lakh Crores of withdrawn money plus smaller denomination amounting to Rs.2.52 Lakh Crores (Rs.17.97 -15.45 Lakh Crores) totaling approximately to Rs.4.00 Lakh Crores in circulation.(as against Rs.15.45 Lakh crores which was withdrawn, post demonetisation announcement.)
This explains the reasons why such a severe cash crunch came about, leading to severe illiquidity in the market with long queues before banks and ATMS, the retail market coming to a stand still and daily wage workers both in agricultural and non agricultural sectors losing their daily earnings. With Rs.500 denomination yet to reach many cash territories across the country, the currency woes can only be expected to last much, much longer than forecasted.
Therefore, the question arises as to what exactly is the policy position on the quantum and value of money to be released into the money market in place of high denomination notes with drawn from the market. Whether RBI will replace the entire quantity of Rs.15.45 Lakhs Crores or so withdrawn from the market or the government has chosen to release only a portion of the money withdrawn into money markets, to move to a less cashless economy, if not to a total cashless economy?. If the Government has veered to the latter position, which it seems so as is consistent with the lesser supplies of cash being made available at the banks, the currency scenario may turn grim and difficult to bear with for the public in the next couple of months, because of the delay and lag in printing new currency and bringing it into the markets.
The Government would do well to publicise its policy on the quantum and value of the replacement of the currency proposed to be infused as against the amount withdrawn, so that the public will be better prepared to get used to alternative channels of settlement to tide over the present situation rather than wasting their time standing in front of banks and hoping against hope waiting for the proverbial manna from heaven that is not going to come in a jiffy. It is time to tell the people, the policy in place rather than playing the Secrecy Clause, which is no longer relevant.