Just following up with several posts on demonetisation. This blog could be renamed as mostly demonetisation!
So, in the earlier post on impact on RBI balance sheet, we just discussed broad ideas. Here we try and see what happened in RBI B/S in 1978 with proper numbers (By the way, here is a copy of the 1978 ordinance). We will also try and see what can happen in RBI’s balance sheet based on what happened in 1978/
Another warning. This is a long long post!
First, just to reiterate. What was the total denom in 1978?
|In Value (Rs cr)||In %age|
|Low Denom Notes and Coins||9097||10870||1773.0||99.2||100||0.8|
|All notes and coins less than Rs10||1285||1325||40.0||14.0||12.2||-1.8|
|Rs. 10 Notes||1825||1957||132.0||19.9||18.0||-1.9|
|Rs. 20 Notes||690||779||89.0||7.5||7.2||-0.4|
|Rs. 50 Notes||995||1440||445.0||10.9||13.2||2.4|
|Rs. 100 Notes||4302||5369||1067.0||46.9||49.4||2.5|
|Rs. 500 Notes||—||—||—||—||—||—|
|High Denomination Notes Demoned||73.08||-73.08||0.8||-0.8|
|Rs. 1000 Notes||55||-55.0||0.6||0.0||-0.6|
|Rs. 5000 Notes||17.97||-18.0||0.2||0.0||-0.2|
|Rs. 10000 Notes||0.11||-0.1||0.0||0.0||0.0|
- As we can see a total of 73,1 crore of notes were demoned out of which highest share was that of Rs 1000 note. The highest Rs 10000 was just Rs 11 lakhs.
- The share of high denom notes was just 0.8% of the total money.
- In the lower denom notes, we see Rs 100 forming nearly 47% of the currency before demon and Rs 50 with 11%.
- Post denom, we see rise in all currencies. They not just mitigate the impact of denom but actually increase the currency in circulation by Rs 1700 cr!
- The decline in high denom notes worth Rs 73 crore is met by rise in Rs 20 currency alone.
So, in 1978 there was no case of decline in currency and in RBI liabilities. We see this of course in RBI Balance sheet as well:
|Liabilites (in RS crore)||Assets (in RS crore)|
|A||Issue Department Liabs||8602||10267||Issue Department Assets||8602||10267|
|All notes (in circulation and in banks)||8602||10267||Gold coin and bullion||193||219|
|Government of India Rupee securities||6645||7366|
|B||Banking Department Liabs||9214||8098||Banking Department Assets||9214||8098|
|Deposits with RBI||6287||4876||Notes and coins||14||51|
|Central Government||2760||706||Balances held abroad||2123||1961|
|Scheduled commercial banks||1674||2634||Central Govern- ment||0||0|
|Scheduled state co operative banks –||41||46||State Govern- ments||402||170|
|Others||1801||1473||Scheduled commercial banks||331||546|
|Other Liabilities (including reserves)||2927||3222||State co operative banks||595||558|
|Bills purchased and discounted||2809||1675|
|Total Liabilites (A +B)||17816||18365||Total Assets (A +B)||17816||18365|
RBI Balance sheet is divided into issue and banking based on Bank of England format. The British early on relaised to protect the currency side of central bank from banking activities. Moreover, currency at that time was backed by Gold/Silver and the idea was to ensure full/partial backing. It did not want to mix the two balance sheets accordingly.
It is interesting to note that issue department balance sheet goes up by Rs 1665 cr and banking dept balance sheet declines by Rs 1116 crore. Thus, total balance sheet rises by Rs 549 crore. So, banking department undid the rise in issue department. Ironically, it should have been the other way round. One should have seen decline in issue department due to demonetisation and a probable rise in banking department to mitigate the impact of lower currency in the economy.
On Liabilities side Issue Department
- We see currency rising from Rs 8602 crore to 10267 crore. We also see how RBI balance sheet reports lower currency figures than above table. This is because RBI prints only notes of Rs 2 and above. All coins and Rs 1 note are liabilities of government.
- So, we see a rise of Rs 1665 crore in RBI liabilities whereas above we saw Rs 1669 crore rise in total liabilities of RBI and govt.
Now we move to banking department liabs .
- First, we see decline in deposits or cash balances held by government (both centre and states) and banks. We see decline in cash balances of centre and rise in states.
- Bank balances with RBI go up with central bank. This is due to rise in deposits which rose during the period. As the high denom was just Rs 73 crore, hardly anything would have come as deposits via this route.
|In Rs crore||Demand Deposits||Time Deposits|
- Next is other liabilities which basically represents various types of reserves. The current discussion is lot on this item. People say that as currency liabilities shrink due to black money not coming back as an exchange or deposit. This will lead to decline in currency liabilities. In order to balance the balance sheet, the difference will be adjusted in reserves and we will see a rise in reserves.
- There is talk that government might take away part of reserves as profits and lower its deficits and so on. I don’t think it can happen. A currency liability is an honor to pay the bearer certain sum of money. It is a continuous liability of Reserve Bank which shall always remain. It cannot be extinguished and taken away as profits to the government. This will defeat the purpose of the entire exercise and shall be criticised hugely!
- Though, in 1978 as there was no shrinkage of currency, we see just a marginal rise in reserves which is not due to demon. How much will this rise in 2016-17 is to be seen.
On Assets side (we look at both the departments together):
- Forex assets: In banking department, we see decline in forex assets (called as balances held abroad). We see forex reserves rise by 891 cr in Issue department and decline by 162 crore in Banking. On a net basis, forex reserves rise by 729 cr. So, RBI bought Rs 729 crore of forex and transferred Rs 162 crore from Banking department.
- Gold and Government Securities: In Banking side, item investments includes both gold and government securities. SO for comparison purposes we include gold and G-sec of issue department as well. In issue Gold and G-sec rise by 747 crore whereas they decline by 225 cr in Banking. SO again, RBI bought gold + securities worth Rs 522 cr and transferred Rs 225 cr from Banking department.
- In Bills purchased and discounted, we see decline of Rs 1123 crore. At that time RBI eased/declined liquidity via discounting of bills. This shows RBI tightening liquidity via this measure. Now this measure is more or less defunct.
- In loans, we see rise in Commercial banks and IDBI and decline in State govts and State Coops. In today’s time, much of RBI control of liquidity is via loans to Commercial banks. The repo transactions are recorded in loans to SCBs.
In 2016-17, if there is a decline in currency liabs, we will see a decline in issue assets side as well. As reserves will rise in banking liabs, we will see a rise in banking assets as well. There shall be transfer of assets from Issue department to Banking department to balance the entire thing.
Net net, I don’t think there is a case for RBI giving reserves as profits to the govt if we see notes not coming back. All we will see is inter-departmental changes in asset holdings. The last balance sheet available on 4 Nov 2016 looks like this:
|Week Ended – Nov 4 2016-17|
|Liabilities In Rs billlion||Assets|
|Issue Department||Issue Department|
|1 Notes Issued||17742.0||1 Foreign Currency Assets (both issue and banking)||23156.0|
|1.1 Notes in Circulation||17741.9||2 Gold Coin and Bullion||1367.9|
|1.2 Notes held in Banking Department||0.1||3 Rupee Securities (including Treasury Bills) (both issue and banking)||7562.4|
|Banking Department||Banking Department|
|2 Deposits||5743.0||4 Loans and Advances||468.1|
|2.1 Central Government||1.0||4.1 Central Government||–|
|2.2 Market Stabilisation Scheme||–||4.2 State Governments||43.1|
|2.3 State Governments||0.4||4.3 NABARD||–|
|2.4 Scheduled Commercial Banks||4094.7||4.4 Scheduled Commercial Banks||371.0|
|2.5 Scheduled State Co-operative Banks||33.9||4.5 Scheduled State Co-op.Banks||–|
|2.6 Other Banks||237.0||4.6 Industrial Development Bank of India||–|
|2.7 Others||1376.0||4.7 Export-Import Bank of India||–|
|3 Other Liabilities||9216.6||4.8 Others||54.0|
|5 Bills Purchased and Discounted||–|
|7 Other Assets||124.0|
|Total Liabilities /Assets||32701.6||32701.6|
RBI Weekly Statistical Supplement does not give Issue and Banking differentiation. But we can broadly seperate the two departments on all items except forex and g-sec assets.
Hence, in subsequent weeks, on liabilities side we may see decline in currency and rise in other liabilities. On assets side, as issue and banking differences are not there, so we will never know what is going on. People will match decline in currency with rise in other liabilities which will indicate the nature of adjustments needed on assets side between the two departments.
Keep watching this space for what eventually happens!