As the country struggles to cope with a desperate shortage of currency, new notes worth only Rs 1.5 lakh crore have come into circulation so far, says a November 25 Credit Suisse research report. A large share of this amount has been in the form of Rs 2,000 notes, “which are not ideal for transacting”, says the report. The Rs 1.5 lakh crore worth of new notes supplement the Rs 2.2 lakh crore of residual currency (other than Rs 500 and Rs 1,000 notes) already in circulation. But it could be “several months” before the Reserve Bank of India is able to plug the Rs 14.18 lakh crore hole left behind by the withdrawal of the 2,203 crore pieces of Rs 500 and Rs 1,000 notes, as per the estimates.
“To meet the new currency demand, industry estimates indicate that the RBI has already been able to print 150 crore (Rs 3 lakh crore worth of currency). However, these notes being high value and with remaining currency <15 per cent of the total currency, they are unable to provide enough liquidity to transact,” the report says, adding that it estimates a need for 1,000-2,000 crore pieces of the new Rs 500 notes to get back to the “normal transactional volumes”.
Official details about the central bank’s print order are sketchy. On November 18, the RBI had informed Madras High Court that it could not disclose details of the release of the new Rs 500 denomination note to banks because of security reasons.
Four days later, on November 22, the RBI disclosed that banks had disbursed Rs 1.03 lakh crore to customers through branches and ATMs since November 10 until November 18. Banks had garnered Rs 5.44 lakh crore (exchange amounted to Rs 33,006 crore and deposits amounted to Rs. 5.11 lakh crore), RBI said in statement.
Of the Rs 14.18 lakh crore worth of notes that were discontinued, cash deposited in banks amounted to approximately Rs 6 lakh crore, according to a representation made by Attorney General Mukul Rohatgi to the Supreme Court on November 23.
According to the Credit Suisse report, considering trends in the past week, “it appears RBI has been able to print only 4-5 crore pieces/day of the new Rs 500”. It said that until last weekend about 40 crore of these were issued to the banks, which translated to only Rs 20,000 crore in value.
This is broadly corroborated by ICICI Securities Primary Dealership data, which, based on RBI data on production of notes over the last three years and some assumptions, estimates that 64% of the value of older high denomination notes would be in circulation by January 2017.
“The requirement of notes could be higher if normal demand for currency picks up as and when the government relaxes withdrawal limits and more ATMs become operational. It is possible that the circulation normalises before January 2017 but for that the presses would need to operate at more than 150% capacity utilisation, which might be physically improbable…,” the report said.
The crunch might go on for longer considering that at 100% capacity, ICICI Securities estimates, normalcy might not be restored until March 2017.
The sharp spurt in deposits is beginning to pose a serious problem as well. On November 26, the RBI instructed banks to keep all incremental deposits between September 16 and November 11 with the central bank as it sought to absorb the surge of liquidity since the government asked people to deposit their Rs 500 and Rs 1,000 notes in bank accounts.
“More deposits and restrictions on withdrawal has resulted in a surplus of Rs 6 lakh crore and corresponding amount of government securities can’t be issued. The RBI had to mop up this significant chunk of liquidity as it would have created a problem had it crossed Rs 7-8 lakh crore. The announcement of CRR hike by RBI is a way of sterilisation of liquidity without creating any additional cost,” said Soumyajit Niyogi, associate director, Credit & Market Research Group, India Ratings & Research.
In a November 23 note, India Ratings had pointed out that the amount of government securities available with the RBI to offer banks in exchange for the spurt in deposits was nearing a critical limit, which may force the central bank to look at alternative means to sterilise liquidity.