What about cash that doesn’t return?

What about cash that doesn’t return?: Transferring RBI’s windfall gains, arising out of demonetisation, to the Centre is a perverse way of bridging the...

"The accounting part is now well understood. On the day of transfer, it is buyback of old debt by the Government from the RBI. Any other use of this fund by the Government can impact fiscal discipline. Moreover, if currency in circulation goes up through large government expenditure, an opportunity shall be lost to reduce the currency-GDP ratio, which is as high as 12 per cent in India compared to about 4 per cent in other emerging economies. The Government should exploit this opportunity to
popularise non-cash payments.
The windfall gain for the RBI need not be treated as windfall loss for the system. Pending improvement of banking habit of the people towards a less cash society, both the RBI and banks shall work as conduit for restoration of currency in circulation as per demand through day-to day liquidity management. Force feeding of currency into the system by transferring gains to the Government may be counterproductive."
Nice analysis. The options before GOI are (a) allowing the financial system become robust by making the central bank balance sheet stronger or (b) ask for the share of 'notional' gains and meddle with the already diminishing people's trust in governance, risking unmanageable problems in public debt management. 
M G Warrier


Anonymous said…
Nice posting & nice analysis . Thanks.

Rangasayee .

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