The government passed an ordinance today on demonetisation of Rs 500 and Rs 1000 notes and effectively removed the liability of the government and RBI on the notes after 31st of March 2017. Of the Rs 15 trillion of Rs 500 and Rs 1000 notes in circulation, the data available as of 28th December shows that around Rs 13.5 trillion could have come back as deposits.
The reverse repo outstanding is Rs 1.37 trillion and MSS (CMB) outstanding is Rs 5.34 trillion. Public has withdrawn Rs 6 trillion of cash and banks have placed additional Rs 400 billion as CRR on the deposits. All this adds to Rs 13 trillion. Giving a leeway of Rs 500 billion, we can assume that around Rs 1.5 trillion is yet to be deposited and given just two more days to deposit with banks, that large sum looks unlikely to be deposited.
RBI as of 31st March 2017, if it does not receive all the Rs 500 and Rs 1000 notes in circulation, will extinguish its liability on these notes, take the amount leftover to its P&L and will the pay dividend to the government from its profit. The amount could be as large as Rs 1.5 trillion.
The government could also receive around Rs 1 trillion through its second black money disclosure scheme, which it announced for demonetisation. Total fiscal windfall for the government could be Rs 2.5 trillion.
As of 9th December 2016, the data from RBI indicates that around Rs 11.5 trillion has come in to the system as deposits. Banks have parked Rs 1.4 trillion in reverse repos and have bought Rs 1.65 trillion of CMB (Cash Management Bills). Banks have borrowed Rs 1.49 trillion through repo. Banks CRR has increased by Rs 4 trillion due to deposit flows and incremental CRR. Cash withdrawals was around Rs 4.3 trillion.
Of a total of around Rs 14.5 trillion of Rs 500 and Rs 1000 notes in circulation, Rs 11.5 trillion has been deposited and with another 25 days to go, more deposits could come in.
RBI has removed the incremental CRR from 10th December and banks CRR position would come down and liquidity will increase by around Rs 3.5 trillion. RBI will manage the excess liquidity through issue of MSS bonds and through reverse repos. RBI will also start allowing higher withdrawals and that would lower system liquidity.
The government has fixed a new ceiling for issue of MSS Bonds (Read our Note on MSS Bonds) at Rs 6 trillion from Rs 300 billion. The higher ceiling will enable the RBI to manage the deposits coming into banks on demonetisation.
As of 2nd December, banks had an outstanding of Rs 2.36 trillion in reverse repo and Rs 1.3 trillion in Repo. Banks have been maintaining an Incremental CRR of around Rs 3.5 trillion, which will go on till the 9th of December.
RBI will now use MSS bonds to manage the liquidity. The bonds are most likely to be in the form of 28 to 91 days cash management bills or treasury bills.
Bond markets were expecting the MSS announcement and bond yields, while initially rising, will take direction from RBI policy next week.
Reserve Bank of India has announced the auction of 28 days Government of India cash management bills for a notified amount of Rs200 Billion as of 2nd December 2016.
The Incremental CRR imposed on banks starting this fortnight beginning 26th November, will immediately impound around Rs 3 .5trillion of liquidity. Banks are lent over Rs 5 trillion through reverse repo to the RBI of which, reverse repos maturing in the next one week is around Rs 2.5 trillion. Banks can also exchange old notes for immediate credit for CRR with the RBI.
Banks while flushed with liquidity, will be scrambling for cash this week to maintain CRR. Money market rates and bond yields will rise initially on the back of the RBI move, but will then fall again as this move is temporary and will be reviewed next fortnight. Bond markets are expecting a 50bps rate cut on the back of expected fall in GDP growth and inflation on the demonetisation move by the government. Read our analysis on “Bond markets have factored in a 50bps rate cut”.
RBI has announced temporary measures by applying an incremental cash reserve ratio (CRR) to absorb a part of surplus liquidity created due to demonetisation.It has been decide that on the increase in NDTL (net demand and time liabilities) between 16th September 2016 and 11th November 2016, scheduled banks need to maintain an incremental CRR of 100%, starting the fortnight from November 26, 2016. Further It is likely to be reviewed on 9th December 2016 or even earlier.This temporary measure intended to drain excess liquidity in the system.
During 16th September to 11th November bank deposit increased 3.811 trillion,
Black Money Disclosed?
On 28th November Government of India Surplus Cash Balance increased sharply by Rs 1.4 trillion to Rs 1.415 trillion. The rise in sharp rise government surplus cash balance was overnight and raises the question of how did the government receive such high inflows. Third quarter advance tax payment is due only on the 15th of December and the government has not done any stake sales during this period.
Could it be that inflows into banks on demonetisation has seen black money being declared? The government has provided a disclosure window for black money and if the rise in government surplus any indication, individuals are using this window to disclose black money instead of letting it go down the drain.
Of the close to Rs 14.9 trillion of Rs 500 and Rs 1000 notes, banks have received more than half as deposits and if there is steady trickle of black money disclosure over the next one month, government’s fiscal will look extremely good. RBI would be able to cut rates to ward off demonetisation effect on growth and bond yields would trend down sharply from hereon.