Impact of demonetisation on RBI Balance sheet in 1978 and gauging trends for today…

Just following up with several posts on demonetisation. This blog could be renamed as mostly demonetisation!

The earlier posts discussed with some ideas like impact on RBI balance sheet. Tried to make later ones with more data and facts like history of demon in India, trends in counterfeit currency.

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
1977-78 1978-79 Difference 1977-78 1978-79 Difference
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
Total 9170.08 10870 1699.9 100.0 100.0 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)
    1977-78    1978-79      1977-78    1978-79   
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
Foreign securities 1753 2644
Rupee coins 11 38
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
State Governments 11 17 Loans 2106 2351
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
IDBI 614 868
ARDC/ NABARD 164 209
Others 1 1
Bills purchased and discounted 2809 1675
Internal 117 106
Government treasury 2692 1569
Investments 1077 852
Other assets 1085 1208
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
1977-78 5687 18518
1978-79 6895 22820
  • 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
5.1 Commercial
5.2 Treasury
6 Investments 23.2
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!


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