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  1. Was demonetisation a total failure? Read what RBI report says before making your conclusion

Was demonetisation a total failure? Read what RBI report says before making your conclusion

The Reserve Bank of India's annual report today revealed that only around 1.4% of scrapped Rs 1,000 notes didn't come back into the banking system post demonetisation.

By: | New Delhi | Updated: August 31, 2017 10:27 AM
demonetisation, demonetisation report, rbi annual report, note ban, rbi report, rbi RBI annual report was released on Tuesday.

The Reserve Bank of India’s annual report today revealed that only around 1.4% of scrapped Rs 1,000 notes didn’t come back into the banking system post demonetisation. Out of 632.6 crore pieces of Rs 1,000 currency notes in circulation, 8.9 crore haven’t yet returned to banks. Prime Minister Narendra Modi had announced the decision to scrap old Rs 500 and Rs 1,000 notes in a bid to weed out black money in the country on November 8, 2016.

In the weeks following demonetisation, ruling politicians at the Centre had claimed that most of the black money was stocked by people in the form of high-value currency notes like Rs 1000 and Rs 500. The RBI report doesn’t give a clarity on the number of old Rs 500 notes that didn’t return to the banks. However, the meagre amount of banned Rs 1000 notes not returning to the banks shows their claim was exaggerated.

According to the report, around 89 million old Rs 1000 notes were in circulation in March 2017, while in March 2016, around 6.3 billion Rs 1000 notes were in circulation. This means that 89 million (or 8.9 crore) of Rs 1000 notes, which were banned by Centre in November, didn’t return to the banks.

So, did demonetisation completely fail in bringing black money to the banks? The RBI report doesn’t clearly say whether demonetistion was a success or a failure. However, it does point out that a sharp dip in total currency in circulation (CIC) was recorded post demonetisation, helping India’s currency to GDP ratio compare with a host of advanced economies, including Germany and France.

“Buoyed by festival demand and a bumper kharif harvest, a renewed pick-up in currency in circulation was beginning to form in Q3 when demonetisation abruptly stifled it. On November 4, 2016, CIC had scaled an all-time high of Rs 18 trillion taking RM (Reserve Money) to a peak of Rs 22.5 trillion,” the report said.

demonetisation, demonetisation report, rbi annual report, note ban, rbi report, rbi Chart by RBI.

“At end-March 2017, CIC amounted to 8.8 per cent of GDP, down from 12.2 per cent in the previous year. At this level, India’s currency to GDP ratio compares well with a host of advanced and emerging market economies (such as Germany, France, Italy, Thailand and Malaysia),” it added.

During a short span from November 9 to December 31, 2016, the Reserve Bank supplied 23.8 billion pieces of bank notes into circulation, which was Rs 5,540 billion in value. Post demonetisation, the currency in circulation fell to Rs 9 trillion on January 6, 2017, a level which was seen more than six years ago.

According to the report, “While banks’ vault cash shot up in the immediate aftermath of demonetisation, it quickly dropped as the Reserve Bank mounted unprecedented liquidity absorption operations to mop up the massive influx of liquidity as SBNs were returned by the public. As a result of these large changes, a downward spiral in reserve money took it down to Rs 13.8 trillion (61 per cent of the peak) by January 6, 2017. Reserve Money is sum of a country’s currency in circulation and banks deposits with the RBI.

(This report was first published on August 30, 2017)

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