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Govt's own decision created currency crisis

RBI will need to print more notes and the cash gap will persist for some more time.

New Delhi: While experts are postulating new theories and customers still facing dry ATMs, the cash chaos seems to have stemmed from a government decision. Last year it decided to stop printing of Rs 2,000 currency notes and forgot to revisit it. Sources said the government must have thought of phasing out Rs 2,000 banknotes at that time.

While the government has blamed low circulation of Rs 2,000 notes on possible hoarding, it has not acknowledged its own role in the crisis, said a banker.

Another banker remarked that the problem was waiting to happen. In India, the demand for low-value cash is always high as it’s an informal economy with a large base of lower and middle income groups, he said and added, if not replenished with fresh high value notes in time, the crisis would happen.

According to sources, in April 2017, RBI sought out the government to print Rs 100 crore worth of Rs 2,000 notes, which the finance ministry declined. The status quo remains till date, they added.

On Thursday, a finance ministry source said the government tried to replace Rs 2,000 currency notes with Rs 500 bank notes, and there seems to be some issues here. It must have happened that not enough Rs 500 notes were printed, which could have matched the requirement of Rs 2,000 bills.

However, there could be multiple reasons for the situation like logistical issues, elections, they said. According to another report, there has been a sharp decline in the supply of Rs 2,000 notes to the currency chests.

It flies in the face of the fact that there are no elections in Telagana or other states but for Karnataka.

According to an RBI report, the share of newly introduced Rs 2,000 notes in the total value of currency in circulation was 50.2 per cent at the end of March 2017. In terms of numbers, it was 3,285 million pieces.

According to a newspaper report, RBI stopped supplying these notes from July 2017. Similarly, the value of currency in bank chests also declined sharply.

To meet the “unusual” currency demand, the government, according to DEA secretary SC Garg, has decided to increase printing of Rs 500 notes by five times. But he didn’t speak on printing or increasing the printing of Rs 2,000 notes.

“There is no need for supplying Rs 2,000 notes as it’s in oversupply. The total worth of Rs 2,000 notes in the system is Rs 7 lakh crore, which is huge and the supply of Rs 2,000 note beyond this is not required. Besides, lower denominations notes are in oversupply,” he had said.

A banker said it appears that this is exactly what may have happened. According to an RBI report, the share of newly introduced Rs 2,000 notes in total value of currency in circulation was 50.2 per cent at the end of March 2017. In terms of numbers, it was 3,285 million pieces.

According to another report, there has been a sharp decline in supply of Rs 2,000 notes to bank chests.

Meanwhile, Neeraj Vyas, DMD (chief operating officer), SBI, said, “of the 40,000 ATMs owned by SBI, 32,000 have been recalibrated and are disbursing the new Rs 200 notes.”

Dhananjay Sinha, head Institutional Research at Emkay Global Financial

Services, said, “We have studied all election years right from 1998 till date and didn’t find any evidence of currency demand rising during election time. Also there is no clear official guidance to RBI to restrain printing of notes. We feel after demonetisation, the pace at which the value of notes that were getting replenished was slow and that could be one of the reasons that led to the recent cash crunch.”

“Since November 2016 when demonetisation happened, if you observe these 15 months of remonetisation, we saw that nearly half the time, RBI was printing Rs 2,000 notes. Only in the second half it printed lower denomination notes of Rs 500, Rs 200, Rs 50 or so. Prior to demonetisation, the rate at which the currency outstanding was growing was 12-15 per cent. After remonetisation up to March the currency outstanding has touched Rs 18 lakh crore which is what we were prior to demonetisation. But if you take into account the organic demand for the currency assuming a growth of 7-8 per cent then there is shortfall in the order of demand of Rs 1.30-Rs 1.40 lakh crore. It is likely that the RBI will need to print more notes and the cash gap will persist for some more time,” added Sinha.

( Source : financial chronicle )
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