RBI on Demonitisation

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The minutes of meeting which had approved the demonetisation of Rs 500 and Rs 1000 currency notes has been revealed through RTI. The government had contested that demonetisation would help curb black money and a steep rise in Rs 500 and Rs 1,000 notes; check the circulation of fake currency and promote e-payments and financial inclusion.
Observations made by RBI
  • RBI Directors had contested the government’s claim about curbing black money by highlighting that most of the black money is held not in cash but in the form of real sector assets such as gold or real estate and this move would not have a material impact on the assets.
  • RBI Directors refuted the government’s argument about the growth in high denomination notes being much faster than the pace of economic expansion, by reasoning that when adjusted for inflation, the difference may not be so stark.
  • RBI has stated that even though the incidence of counterfeiting is a concern, Rs 400 crore as a percentage of the total quantum of currency in circulation is not very significant.
Despite these reservations and disagreements, the RBI board had approved the demonetisation in larger public interest as it provided an opportunity to promote financial inclusion and digital payments. Further the government had assured the RBI directors that it would take measures to contain the use of cash and promote financial inclusion and electronic modes of payment.

Latest Stats

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Term Current Status As on
Repo Rate 6.5% 06/12/2018
Cash Reserve Ratio 4% 06/12/2018
Reverse Repo Rate 6.25% 06/12/2018
Marginal Standing Facility 6.75% 06/12/2018
Bank Rate 6.75% 06/12/2018
Statutory Liquidity Ratio 19.25% 06/12/2018
Foreign Exchange Reserve $393.12 Billion 22/12/2018

Repo rate: It is rate at which RBI lends to its clients generally against government securities.

Reverse Repo Rate: It is rate at which banks lend funds to RBI.

Marginal Standing Facility (MSF) Rate: It is rate at which scheduled banks can borrow funds overnight from RBI against government securities. It is very short term borrowing scheme for scheduled banks.

Bank Rate: It is rate charged by central bank for lending funds to commercial banks. Higher bank rate will translate to higher lending rates by banks. It influences lending rates of commercial banks.

Cash Reserve Ratio (CRR): It is amount of funds that banks have to keep with RBI. The RBI uses CRR to drain out excessive money from system.

Statutory Liquidity Ratio (SLR): It is amount that banks have to maintain a stipulated proportion of their net demand and time liabilities (NDTL) in form of liquid assets like cash, gold and unencumbered securities, treasury bills, dated securities etc. It will be reduced by 25 basis points every quarter until it reaches the 18% level.