Full text of former RBI governor D Subbarao's views on demonetisation

Full text of former RBI governor D Subbarao's views on demonetisation: The decision has the potential to deliver enduring gains, provided the measure is followed to its logical closure, he says...

"Currency in circulation, as per the Reserve Bank of India (RBI) data, is USD 250 billion (Rs. 16.5 trillion) of which 1000 and 500 rupee notes constitute 85 percent (USD 212 billion or Rs. 14.0 trillion).

On the assumption that 75 percent of this money is returned to the banking system (either through cash exchange or deposit into accounts), about USD 160 billion or Rs. 10.5 trillion will return to the banking system, while the balance USD 52 billion (Rs. 3.5 trillion) – as much as 2.5 percent of the GDP - will be destroyed."

Excerpts from another media report*:
"Speaking at MintAsia’s global banking conclave in Singapore, Subbarao cited speculation that the Indian government could use the currency that is not returned to solve its fiscal problems or to recapitalize banks, but pointed out that such a step would send out the wrong message.
“Then demonetization will be viewed as being done with other motives, rather than fighting black money,” Subbarao said.
“For argument’s sake, let us assume that a quarter of the Rs500 and Rs1,000 currency notes in circulation does not come back—this is equivalent to about Rs3.5 trillion, and can be considered as a windfall profit for the RBI. By law, the central bank has to transfer all its profit to the government. If RBI treats this as a profit, and the Centre demands that this be transferred to it, and they use this to play Robin Hood or to recapitalize the banks, or for whatever other purposes, this will send out the wrong message. I don’t believe that this is the intention of the current government, but if they were to do such a thing, it will be highly ill-advised,” he said."
*Source: Livemint website,
Blog Post No: W/2429


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