Demonetisation Questions: When Will the RBI Stop Printing Notes?

Will the Modi government’s digital push help it curb “excess cash” and print fewer notes than what was extinguished through demonetisation?

Will all notes that were demonetised be printed and injected into the system? Credit: Reuters

Will all notes that were demonetised be printed and injected into the system? Credit: Reuters

New Delhi: Over the last few weeks, within financial policy and banking circles, the issue of ‘optimal re-monetisation’ has started being debated. The question, as one senior banking executive puts it, centres around how many notes the Reserve Bank of India (RBI) plans on printing.

On November 8, the day demonetisation was announced, Rs 15.44 lakh crore worth of high-value banking notes were extinguished from India’s economy. How much of that Rs 15.44 lakh crore worth of banking notes will be replaced in the form of the new notes and smaller-value currency notes?

In the months after demonetisation, government officials indicated that “full remonetisation” would not take place. In December 2016, both finance minister Arun Jaitley and economic affairs secretary Shaktikanta Das indicated that the Centre had no intention of printing all the currency that was demonetised.

“One of the efforts of this exercise has to be that even though a reduced cash currency could remain, our conscious effort… (is) to supplement the rest with a digital currency,” Jaitley said while addressing FICCI’s annual general meeting.

Prime minister Narendra Modi drove home this point during his New Year eve speech, where he sharply criticised the role that “excess cash” had played in causing inflation, increasing corruption and boosting the growth of black money in India’s economy.

Digi Dhan?

The question then becomes – if the RBI doesn’t plan on printing currency worth Rs 15.44 lakh crore, how much does it plan on printing? And to extent will digital payments pick up the slack?

The pace of re-monetisation from January 2017 has been a little sketchy. In early February, Das indicated that “re-monetisation was near complete” although multiple banking and analyst reports indicated that only 70-75% of re-monetisation had happened by the end of February, 2017.

RBI deputy governor Viral Acharya further muddied the waters in early March, when he pointed out that it would take another “two to three months” to reach “full currency in circulation”. What does full currency in circulation mean? Acharya cryptically replied: “It will be slightly lower but it is in that ballpark (number).”

Multiple analysts and banking executives tell The Wire that “optimal re-monetisation” depends on three factors. Firstly, the extent to which the finance ministry and the RBI believe there is “excess cash” floating in India’s economy.

It also depends, secondly, on how much of the liquidity crisis caused by cash crunch has eased – both for small businesses and for the average urban and rural consumer.

The last factor is the extent to which digital payments can pick up the shortfall caused by the difference in ‘actual cash in circulation’ and ‘required cash in circulation’.

“The term excess cash could mean many things. It could be the amount that the government and central bank believes is black money held in cash. It could also include the amount of physical currency that could ideally have been conducted over digital methods but was not being done simply out of convenience or to avoid digital transaction fees,” a senior banking official, who declined to be identified, told The Wire.

Re-monetisation by April 15-21

A recent State Bank of India (SBI) Research report, authored by chief economist Soumya Kanti Ghosh, offers an interesting take on what ‘optimal re-monetisation’ should look like and how many notes should be printed.

Ghosh’s calculations are simple. As of March 24, 2017, roughly 13 lakh crore of the 15 lakh crore rupees that was demonetised has been introduced back into the system. The amount of “excess cash” or the cash that the Indian government would want to eliminate is taken as Rs 2.5 lakh crore.

                                         Arithmetic of Currency Printing (Rs trillion)
Total Currency in System on November 4, 2016 17.97
Currency Extinguished on November 8, 2016 15.44
Currency in Circulation on March 24, 2017 13.12
Currency “shortfall” as of March 24, 2017 4.85
“Excess Cash” in System 2.50
Expected shift to digital payment avenues 1.20
Remaining printing requirement 1.15

“We… believe that RBI need not print the entire amount of extinguished currency. This is because first, already there was excess cash floating in the system before demonetisation took place. Second, the push for digital transactions has shifted a sizeable population towards less cash usage. Taking these into account, we believe RBI should only print Rs 1.15 trillion more from March 24 levels,” the SBI report reads.

Going by these calculations, close to Rs 1.17 trillion (lakh crore) worth of notes need not be printed.

However, the SBI’s arithmetic is based on hypothetical fixed value of digital transactions that need to take place. Ghosh estimates the current size of “digital banking” – which includes credit/debit card transactions, and PPI/mobile transactions – to be in the range of Rs 2.3 lakh crore. “This size has to increase from the current level to at least Rs 3.5 lakh crores (which is a conservative estimate of the gap between the actual currency in circulation and required currency in circulation),” the report says.

Whither digital?

How accurate is this estimate of digital transactions? As multiple analysts point out, it is important, not only because the Modi government and the Niti Aayog have set internal targets, but because it will decide how many notes the RBI will end up printing.

Data released by the RBI do indicate that the number of digital transactions between November 2016 and January 2017 did see significant growth – 545 crore digital transactions for the three-month period, which is 38% higher than the number of transactions in the same period a year ago.

However, this growth isn’t spectacular, with digital payments slowing down in both value and volume according to multiple estimates. The next few months will give us data for January – March, 2017 and show how growth in digital payments have held up as more cash is eased back into the system.

Ultimately, however, the RBI’s decision on how much cash will be printed will also decide whether the two major justifications given for demonetisation – “excess cash” in the system, and a successful digitisation push – have been seen through.


    Printing of notes itself means at least partial acceptance of the failure of demonetization . Moreover, the purpose of this fiasco might have been to win the elections by gaining popularity through ‘ demonetization means’ . The issue of corruption and non- recovery of NPAs and mallya affair was almost diverted. Hence, currency ban achieved many goals. Also, non- cash transactions, purchase of paytms, smartphones, etc increased. Therefore, demonetization achieved many things corporates wanted though it affected poorer sections, rural economy and loss if jobs.
    Now, may be, the RBI stopping printing of notes may be irrelevant …