RBI cuts down on printing of new currency notes as vaults filled with old ones

RBI vaults and currency chests are still clogged with junked old Rs 500 and Rs 1000 notes that returned to the system after demonetisation.

The Reserve Bank of India (RBI) has reduced its order for printing bank notes in the current financial year to the lowest in five years for lack of space in the currency chests of the central bank and commercial banks, two people familiar with the matter said.

The indent (government jargon for order) for fiscal year 2018 now stands at 21 billion pieces of currency compared to 28 billion pieces in the previous year, the two people said on condition of anonymity. The average indent for banknotes over the past five years was 25 billion pieces.

Experts said last year’s indent was an aberration as RBI had been preparing to introduce a new series of notes. Indeed, actual supply was higher at 29 billion notes .According to a 6 November Mint article, R Gandhi, former deputy governor of RBI, said work on introducing the new series of banknotes was initiated in January 2016.

RBI has partially completed the remonetisation process after having withdrawn old Rs 500 and Rs 1,000 notes, which were rendered invalid on 8 November 2016. According to the latest RBI data, currency in circulation as of 13 October stood at Rs15.3 trillion, which is just 10% lower than a year ago.

“There is very little space in currency chests and RBI vaults to keep the new notes even after 50-60% of the demonetised notes have been transferred from the chests to RBI,” said a senior executive with a private sector bank.

RBI declined to comment.

According to the two other people aware of the matter, the lack of space in RBI vaults and currency chests is due to the pile-up of junked Rs 500 and Rs 1,000 notes that returned to the system after demonetisation. The notes are still being counted before being destroyed.

According to a 29 October Press Trust of India report, the central bank is currently in the process of verifying the demonetised bank notes using a sophisticated currency verification system. The report said the RBI had already processed about 11.34 billion Rs500 notes and 5.25 billion Rs1,000 note totalling some Rs 10.91 trillion.

Not only is the current year’s indent lower, it also does not take into account the fresh printing required to replace nearly 12 billion soiled notes released into the system following demonetisation.

In November 2016, the regulator had reissued soiled notes of Rs 10, Rs 20 and Rs 50 denominations after demonetisation resulted in a currency crunch, according to the first of the two persons cited earlier.

According to RBI, a soiled note is a currency note which has become dirty due to normal wear and tear. Two pieces of the same note pasted together to form a whole, with no essential feature missing, is also counted as a soiled note.

“Reduction in indent is a conscious effort by RBI to keep within reasonable limits and optimising it with production capabilities. However on the downside, there has been a perceptible increase in soiled notes over the last few years. This will put additional burden on using currency as a medium of exchange” and act as a disincentive for use of cash, said Soumya Kanti Ghosh, group chief economic adviser at State Bank of India.