Cost of DeMo: RBI dividend payout halves to Rs 30,659 cr

The demonetisation exercise has hit the central bank’s dividend payout to the government. The Reserve Bank of India (RBI) on Thursday said its board has approved a dividend of Rs 30,659 crore to the government for 2016-17, a fall of 53.45 per cent compared to the previous year. The RBI had paid a dividend of Rs 65,876 crore for 2015-16.

Cost associated with printing of new notes, destruction of old notes post demonetisation and reverse repo operations to suck out surplus liquidity were the main reasons for such a deep cut in RBI’s dividend payout to the Centre. A lower dividend means lesser non-tax revenues to the government this year and will impact the Central government’s plan to contain fiscal deficit. A lower surplus amount also indicates that RBI’s profit for 2016-17 will be hit. The dividend approved by the RBI board is much lower than the Rs 58,000 set aside in the government’s budget 2017-18.

Soumya Kanti Ghosh, group chief economic adviser, State Bank of India, told FC, “There are several factors that impacted RBI’s surplus to the government but the most important is the seigniorage cost (difference between the value of money and the cost to produce and distribute it).

After demonetisation, the RBI printed high volume of small denomination notes and so the seigniorage cost went up. Secondly, as people deposited their old notes, banks were flush with liquidity. As a result the RBI remained in a reverse repo mode paying interest to banks which too impacted the surplus.”

The government on November 8 announced withdrawal of Rs 500 and Rs 1,000 notes that formed 86 per cent of the currency in circulation. The RBI so far has refrained from giving details about the number of old notes that have been deposited in banks during the demonetisation exercise, which ran between November 10 and December 30.

According to estimates, 23-24 billion of Rs 500 notes and six billion of Rs 1,000 notes had to be returned to the system.

R Gandhi, former deputy governor of RBI had reportedly said, “The net surplus during this year should be coming down only. The foreign exchange reserves, most of the part it was earning negative returns or near about one per cent and net foreign assets are the major portion of the RBI balance sheet. Also, RBI would have been paying interest to banks. So, the outflow would be more, returns are less so naturally net surplus would be less.”

Minister of state for finance Arjun Ram Meghwal, in a written reply to the Rajya Sabha, has said that it costs between Rs 2.87 and Rs 3.09 to a new Rs 500 note and up to Rs 3.77 for a new Rs 2,000 note.

The central bank is mandated by the RBI Act to transfer surplus funds or balance profits to the government after accounting for any funds transferred to the contingency reserve or the asset development fund.