‘Maintain current ratio of Rs.100, Rs.500 notes’

The Economic Research Department (ERD) of SBI Corporate Centre has called for maintaining the ratio of the Rs.100 and the Rs.500 notes in the current proportion in circulation even after printing the new Rs.2,000 and Rs.500 notes.

“Any deviation from the existing proportion will increase the cost of ATM (automated teller machine) replenishment and (result in an) incremental increase in ATM transactional costs,” according to a report.

“When the Rs.1,000 notes are reintroduced, in value terms, the ratio between Rs.1,000 and Rs.2,000 notes must be in the ratio of 50:50 because of the same reason.”

Fiscal bonanza

Stating that “we are staring at a fiscal bonanza,” the report pointed out that even during the 1978 demonetisation scheme, 25 per cent cash with the public did not return to the banking system possibly for fear of getting tracked and thereby getting penalised.

“If we safely assume that 25 per cent of the cash with public would not be converted this time also, it turns out to be Rs.2.5 lakh crore. However, even this number may be a gross underestimation as Rs.9 lakh crore could be the possible (20 per cent of the Rs.45 lakh crore black economy) unaccounted cash in the system. Thus, the actual unaccounted cash not coming back to the system could be significantly higher than Rs.2,500 billion or Rs 2.5 lakh crore,” according to the report.

Balance sheet impact

This would impact the Reserve Bank’s balance sheet in a positive manner, it said. The unaccounted money which was not coming into the system would have reduced its currency liability and hence the asset size would also get reduced proportionally, it pointed out. “This will open up a fiscal windfall for the Government that can be used for need-based funding,’’ the report said.

It estimated that about Rs.5 lakh crore would be pumped into the banking channels as a result of the demonetisation move.

Significantly, the report suggested demonetisation be carried out over periodic intervals with the surprise element intact. “In such an eventuality, people will be discouraged to hold cash as they have been doing since 1978 and prevent any further build-up of a parallel economy.”