Home >industry >banking >Cash crunch likely to persist till end February: SBI Research

Mumbai: Only half of the total value of the demonetised notes is likely to be supplied back into the system by 30 December deadline and the cash crunch may be normalised only by end February, says a report.

“Nearly 50% and 75% of the total value of the extinguished notes can be supplied by December-end and January-end respectively, given the current phase of frantic printing," an SBI Research report said on Monday. At the end of February, 78-88% of the notes could be back into the system under a best case scenario in terms of an optimal currency distribution, it added.

“It seems that within next two months things would be pretty close to normal. Interestingly, this number can go upto 98% if we disregard the currency composition," the report added. When the government announced demonetisation of higher currency notes on 8 November, there were 17.165 billion pieces of Rs500 notes and 6.858 billion pieces of Rs1,000 notes amounting to Rs15.441 trillion (86% of the value of the total amount of currency in circulation).

The Security Printing and Minting Corporation of India and Bharatiya Reserve Bank Note Mudran have been working at a frantic pace to replace the demonetised currency with new notes. The RBI on 10 December had said it had supplied to the public 21.8 billion banknotes of various denominations worth .61 trillion. Of this 20.1 billion pieces belonged to small denominations (of 0, 0, 0 and 00) and 1.7 billion notes belonged to higher denominations of ,000 and 500.

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In a previous statement on 5 December, RBI had said the share of lower denomination notes was Rs1.059 trillion with 19.1 billion bank-notes. “This implies that during 5-10 December, as much as 1 billion notes were printed in small denomination, implying the total lower denomination currency is valued at Rs1.159 trillion if we assume the additional notes were in Rs100 denomination.

“Thus the value of high denomination notes comes out to Rs3.451 trillion (Rs4.610 trillion net of Rs1.159 trillion)," the report said. The RBI has said the combined number of pieces of high denomination are 1.7 billion. “If we do a scenario analysis by assuming that the maximum number of such pieces is of Rs500, then the gap between the corresponding value Rs850 billion and actual value Rs3,451 billion is maximum," it added.

The gap reduces progressively if an alternate The gap reduces progressively if an alternate scenarios is constructed by reducing the percentage of Rs500 notes and increasing the percentage of Rs2,000 rupee notes. The gap is the least when the entire amount of Rs1.7 billion notes are assumed to be Rs2,000, said the report.

According to the report, RBI may have printed ,000 denomination notes (1.716 pieces) worth 432 billion and 9 billion provided as 00 notes (0.04 billion pieces). Thus 500 notes are being printed mostly from December, it said.

The RBI has provided 21.8 billion notes till 10 December and assuming RBI started printing in September 2016 this leads to an average of 7.3 billion notes per month, it said. “However, since RBI would have printed some of the low denomination notes out of these 21.8 billion earlier, we can safely assume an average of 7 billion monthly printing capacity," the report said.

Now, if only 500 denomination notes are printed in December and January, then a total of 14 billion notes will be printed amounting to ,000 billion. Given that RBI has already provided .610 trillion by 10 December it means that around 50% and 75% of the total value of extinguished notes can be supplied by December-end and January-end respectively, it added. “The whole situation of cash crunch will take some time to normalise, but it is incorrect to say the problem will linger on for significant period," the report said.

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