How much has demonetisation cost to RBI?


Though the debate is still going on the overall effects of demonetisation drive on Indian economy but the RBI has cleared the air in its annual report by stating that demonetisation was one of the key reasons of central bank’s lower profitability this year. The central government has also shared the burnt of lower profitability of RBI because of way lower realization of dividends. RBI paid only Rs30,663 crore as dividend to the government compared to Rs65,880 crore a year ago.

Here is how the maths works:

The central bank’s profits took a steep fall of 23.56% for the financial year ending on June,30,2017 due to a couple of reasons as per the annual report.

First, RBI’s income from foreign sources fell around 35% due to the appreciation of rupee and the lower yield on foreign currency assets. Exchange rate plays an important role in foreign income as RBI is obliged to pay its foreign debts in foreign currency denomination say $, any appreciation in the exchange rate would make debt payments costlier.

Second, Net income from domestic sources also fell about 17%  and this was largely due to the payment of interest of Rs.17426 crore. Now let’s understand this arithmetic. Due to demonetisation, 86.5% of the currency was parked back to the banks which in turned parked it to the central bank’s currency chests. Under Liquidity Adjustment Facility(LAF), RBI paid reverse repo rate of interest to the banks which costed it an interest payment of 17426 crores. It is to be noted that during the previous year, the central bank has earned Rs.506 crore under LAF.

On the expenditure side also due to demonetisation, RBI had to print a huge volume of new notes in new design and new security features which has cost it Rs7,965 crore which is more than the double of Rs.3420 crore spent a year ago under the same head of printing new notes.

In the final analysis, it can be said that out of the total decrease in profits which is Rs.35217 crore, about Rs.21971 crore (17426 cr due to interest payment and 4545 crore due to additional printing cost) which amounts to be a significant percentage (62.40 %to be exact) has been caused due to demonetisation.

Hail Demonetisation! At least RBI would be saying that!!

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