While Reserve Bank of India governor Urjit Patel has stated that the withdrawal of Rs 500 and Rs 1,000 notes in itself will not reduce the central bank's liabilities or allow it to transfer a special dividend, the option remains on the government's radar.
A senior government official, who spoke on the condition of anonymity, suggested that while they recognize that the act of withdrawing notes will not reduce the RBI's liabilities, an amendment to the RBI Act could achieve that.
The government will have to consider amending the RBI Act, 1934 to realize any gains arising out of the withdrawal of high-value currency notes in the form of a “special dividend” from the central bank, said the official quoted above.
The decision to withdraw Rs 500 and Rs 1,000 notes was announced on November 8 and citizens have been given until the end of December to exchange old notes. It has been speculated that some amount of the Rs 15 lakh crore withdrawn from circulation is unaccounted cash and will not come back into the system.
The question that has been widely debated is whether this will reduce the RBI's liabilities?
The withdrawal of legal tender status does not extinguish anything from RBI's balance sheet. There is no question of special dividend just by withdrawal of legal tender character.Urjit Patel, Governor, Reserve Bank of India (November 7)
RBI Deputy Governor R Gandhi added that the withdrawal of currency notes will have no impact on the RBI's balance sheet, and hence there is no occasion for a special dividend.
Those comments, however, have not ended speculation on the possibility of a special dividend since government officials continue to speak of an option to amend the RBI Act.
The official quoted above said the RBI Act will have to be amended to extinguish the currency that does not come back into the system. This will reduce the liabilities of the central bank and will then give it a room to give a special dividend to the government, said this official.
Every year, the RBI transfers its surplus to the government in August. In 2016, the central bank transferred a dividend of Rs 65,876 crore to the government.
Even if the government continues to toy with the idea of a special dividend from the RBI, this is unlikely to be accounted for in the upcoming budget. This is because the window given to non resident Indians to deposit old notes closes only on March 31. Only once all deposit windows are closed with the RBI get a clear idea of how much money has come back into the system.
RBI Deputy Governor R Gandhi said customers have deposited Rs 11.55 lakh crore of the Rs 15.4 lakh crore that was withdrawn as part of the demonetisation of Rs 500 and Rs 1,000 notes.
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