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Is Reserve Bank of India a Subordinate Department of the Finance Ministry?

Apr 24, 2017


The Reserve Bank of India(RBI) released the latest monetary policy report on April 6, 2017. In this report, the RBI said that: "In Q4[January to March 2017], remonetisation progressed at an accelerated pace." It also said: "To sum up, economic activity should recover in 2017- 18 on the back of the fast pace of remonetisation".

Remonetisation essentially refers to the RBI printing currency and pumping it into the financial system, in order to replace the currency rendered useless by demonetisation. Notes of Rs 500 an Rs 1,000 denomination were demonetised on November 8, 2016. Since then the RBI has been replacing the demonetised notes with new notes of Rs 500, Rs 2,000 and notes of other denomination which continued to remain legal in the aftermath of demonetisation.

In the monetary policy report India's central bank claims that the remonetisation has happened at an accelerated/fast pace between January and March 2017. The trouble is that its own data shows otherwise. Take a look at Figure 1. It shows the weekly rate of increase in currency in circulation from mid-January 2017 to mid-March 2017.

Figure 1:

As can be seen from Figure 1, the weekly increase in currency in circulation has been slowing down since early January. How is the weekly increase in currency in circulation obtained? The currency in circulation as on January 6, 2017, was at Rs 8,98,017 crore. This jumped to Rs 9,50,803 crore as on January 13, 2017. This meant an increase of Rs 52,786 crore or around 5.9 per cent (Rs 52,786 crore divided by Rs 8,98,017 crore). A similar calculation is carried out for every week since then. This is how the weekly increase in currency in circulation is calculated.

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In fact, by the end of the March 2017, the weekly increase in currency in circulation was at a three-month low, since January 6, 2017. This explains why there has been a shortage in currency in the recent past, with the ATMs running out of money time and again.

In April 2017, the weekly increase in currency in circulation has recovered a little than in comparison to the past. Nevertheless, we need to remember that the total currency in circulation is still a long way away from where it was at the beginning of November 2016, before demonetisation happened.

On November 4, 2016, the total currency in circulation had stood at around Rs 17.98 lakh crore. On April 14, 2017, the latest data that is available from the RBI, the total was at Rs 13.9 lakh crore. The gap between then and now is still at 22.7 per cent. In the pieces that I wrote on demonetisation I had said that the total currency in replacement would be replaced by May 2017. But the pace at which the RBI is currently going, it seems it will take more time than that.

Also, the RBI in the monetary policy report claims that the remonetisation happened at an accelerated/fast pace. This as we can see from Figure 1 is clearly not the case. The rate of weekly increase in currency in circulation at the beginning of January was close to 6 per cent. By end of March this had dropped to 1.7 per cent.

Of course as any base gets bigger, its rate of increase is likely to fall. But in this case, it is worth remembering that we are still nearly 23 per cent down from where the currency in circulation was before demonetisation.

One argument that has been finding favour is that the government needs to bring down currency in circulation so that people move towards digital forms of payment. While there is no denying digital is good, it is not going to happen over a period of a few months. Human habits ingrained for decades don't change that fast. And given that the government will need to maintain the currency in circulation where it was before demonetisation was carried out. Every economy needs a certain amount of money to function and given the recent currency shortage we are nowhere near that.

The question is why has the weekly rate of increase in currency in circulation slowed down. Are the RBI and the government printing presses not working three shifts a day, like they were doing earlier? Is there a shortage of paper and ink? This is something only the RBI or the government can answer. The funny thing is that the banking journalists covering the RBI as a beat, haven't put this question to the central banker as yet.

And what explains the RBI's statement saying that the process of remonetisation or the weekly increase in the currency in circulation, is happening at a fast/accelerated pace. Why is the RBI saying something which its own data does not bear out?

Since the beginning of demonetisation, the communication of the government has been to make it look like a success and that is understandable. A similar bug seems to have bit the RBI as well when it has used words like accelerated and fast, when the weekly increase in currency in circulation has actually slowed down.

This brings me to something that TT Krishnamachari (TTK), who was the finance minister of the country, between 1957-1958 and 1964 and 1964, once said about the RBI. As TCA Srinivasa Raghavan writes in Dialogue of the Deaf-The Government and the RBI: "TTK's view, expressed forcefully... [was] that the RBI was no more than a 'subordinate department of the finance ministry'."

In the case of demonetisation, the RBI is clearly behaving like a subordinate department of the finance ministry. And that does not bear well for the Indian economy.

Vivek Kaul is the Editor of the Diary. He is the author of the Easy Money trilogy. The books were bestsellers on Amazon. His latest book is India's Big Government - The Intrusive State and How It is Hurting Us.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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4 Responses to "Is Reserve Bank of India a Subordinate Department of the Finance Ministry?"


Apr 27, 2017

RBI has deliberately decided to bring down the cash in circulation,in an attempt to pave way to digital-cashless transaction and to increase the velocity of money.However in the absence of increase in deposit interest rate and restriction on cash holding limit,the higher denominations are getting accumulated in the hands of wrong people,thus making it easy to spend 85 crores cash for RKNagar election,transfering 10 crores through havala trasaction by TTV Dinakaran,winning elections (Buying MP/MLA seat) etc. The need of the hour is t set cash holding limit and any cash in excess of the limit should be confiscated without legal recourse,without giving notice.Other wise people will lose faith in Banks,due to dry running of ATM and non availability of cash-forcing RBI to resume the old game of churning out more paper currency and banks to create more fake currency under fractional reserve lending.

RBI being governed under erstwhile RBI Act 1936,continues to act against the interest of the Nation,by investing about Rupees 26 lakh crores in Foreign exchange and Foreign investments (and only a pittance i n Indian investments like NABARD) thus India looses about 5% in interest (it earns hardly 1.5% on its foreign investment and currency holdings.Further India is deprived of it capital and ends up borrowing both externally and internally.RBI by its act encourages conspicuous consumption of petroleum products,on luxury cars,white goods etc,depriving the poor of their share of wealth and encourages the Government to borrow at the cost of the future generation including the unborn child in the womb.It is with sinister motive of encouraging such behavior,RBI has kept about 269 tons of gold (59 T pledged by Shri Vajpayee government,redeemed but not repatriated and 200 T bought from IMF )in Bank of England paying hard earned foreign exchange as warehousing charges,the reason?better FX management" What a shame.
The GOI encourages stock market casino to enable foreign investor to book 21% to 45% profit on investment.Yes we and our elected government are responsible for what is happening to the poor farmers in India.The shifting of wealth from poor to Rich cannot go on endlessly and the dream of GOI to double the income of farmers can only be done in terms of paper currency (which is backed with nothing) and not in real terms.The People should be made aware of the ways in which wholesale loot is going on.



Apr 24, 2017

RBI's subordinate role is a foregone conclusion. There have been instances (read bank nationalisation 1969 &1980 directives on retail lending by a dept of FM,farm loan write offs,even recruitment to top posts (read EDs &CMDs)have all happened without consulting RBI. In a democracy it is natural that the govt of the day should have an upper hand over its own institutions whether it is RBI or SEBI etc. That is why some economists re-labelled the economy as political economy. Some finance ministers(read P Chidambaram)have articulated the relationship between RBI & govt. in an intelligent way. For instance, PC did not purposely intervene in RBI's monetary policy and the media went tom tom about RBI's independence but PC wielded his strings on certain important issues and demonstrated that he is the boss.It is no use to discuss the independence of RBI.If ever the govt keeps quiet on certain monetary or banking issues, it is a bonus to RBI from the govt.


Muthuswamy N

Apr 24, 2017

Have you considered the 23 times increase in the same 3 months?



Apr 24, 2017

government .But anycriticism should be constructive one.For that request the author tosend acopy of this report toRBI and the concerned head of the department.A.BOOBATHI

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