Govt may net Rs 3 lakh cr via MSS bonds, say experts

The Reserve Bank of India (RBI) governor Urjit Patel on Sunday spoke for the first time publicly after the demonetization drive saying that the central bank has announced an incremental Cash Reserve Ratio (CRR) of 100% till adequate quantum of the promised market stablisation scheme (MSS) bonds were issued.

On the basis of roughly of 20% of the old high-value currency notes – Rs 500 and Rs 1,000 – the MSS bonds could translate into a windfall gain of Rs 3 lakh crore, say experts.

"In the final analysis, I think roughly 20% of the high denomination of the money supply; that would be around Rs 3 lakh crore. It would be in the fund. They (government) will have to work out what to do with it. One way or the other, there is going to be a windfall gain for the government," D K Srivastava, chief economist, EY India, said.

He said that once the MSS bonds were issued, the funds will be accessible by the government. But, the government was usually expected to "wait the period of uncertainty out".
Srivastava said by coming out with an incremental CRR of 100%, the RBI was trying to reduce its costs as it will eventually crimp the government dividend.

"The RBI is now trying to reduce its cost because as long as banks are putting this money into the central bank through the reverse repo rate (RRR), the cost is to be borne by it. As the amount of deposits involved are quite large, this entails huge cost for the RBI. Of course, what it means is that eventually it is the dividend of the government which will come down. It is meant to suck out this excess liquidity, so the money will be transferred there and then the government can decide what to do with it," he said.

On Sunday, Patel said the RBI was monitoring the situation on a daily basis and taking all necessary actions to "ease the genuine pain of citizens" and bring back normal situation in the banking operations and improve liquidity in the system.

In an interview with a news agency, he said printing presses were working overtime to meet the cash requirement of people and had started to rebalance the production of new notes towards Rs100 and Rs 500 bills.

Patel also called to people to use cash substitutes like debit cards and digital wallets, saying it will make transactions cheaper and easier and in the long term, it will help India "leapfrog into a less cash-use economy at par with more developed nations."

"We are also urging banks to make a big push with PoS (Point of Sale) machines with traders so that debit card use becomes more prevalent," he said in his first interview with the media.

Giving details of the steps being taken by RBI, he said; "both RBI and government have been getting the printing presses to work at capacity to get the new notes available to meet demand.
Patel said from his daily interaction with the banks, he had gathered that situation was gradually easing; "The queues in branches and ATMs are shorter and the markets are starting to function, and there are no reported shortages of daily items of consumption. Also, about 40-50,000 people were deployed to refit the ATMs. Currency is available and banks are working in a mission mode to lift currency and take them to their branches and ATMs. The staff members of all banks have worked very hard, and we all owe them our gratitude". Defending the dimension and thickness of the of newly printed notes, he said; "People have asked why the new currency introduced was different in size and thickness from the old. This is because the new currency has been designed to make it hard to counterfeit. When you are going to make a change of this magnitude, you need to get the best standards in place".