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Demonetization: When will the cash crunch end?
It will take at least six months to re-print INR15t
5 December 2016
The Economy Observer
According
to
media reports,
INR12.6t – over four-fifth of the specified bank notes (SBNs) – has been deposited with
banks in the first 25 days of the demonetization scheme. With four weeks still left, it is highly likely that the majority of
the SBNs will come back into the banking system.
Although SBNs lost their transactional ability from November 8, 2016 (with some exceptions), the return of SBNs into
banks imply that the
government
has a mammoth task to infuse sufficient (new) currency notes in appropriate
denominations so that the adverse impact on economic activity is not prolonged.
Assuming
that
all the four printing presses in the country are operating every second, our calculations suggest that it
will take at least six months for the government to reissue INR15t. In case the printing presses run on two shifts (as is
usually the case), it will take more than nine months.
With no major wealth destruction and the government introducing a new income disclosure scheme (IDS-II), the
financial benefits of demonetization to the government are unclear. However, with cash crunch likely to remain at least
for six months, the adverse impact of lower velocity will be witnessed at least until June 2017.
What does recent data suggest?
As per Reserve Bank of India (RBI), INR8.5t (~58% of the SBNs) was deposited with
the banking system between November 10 and November 27, 2016.
Media reports
suggest that in the following week (November 28 - December 3, 2016) another
INR4t was deposited, implying that over four-fifth of the outstanding SBNs have
been deposited in the first 25 days of demonetization.
With four weeks remaining
for the scheme to end, it is
very likely that the majority
of SBNs will come back into
the system.
With four weeks remaining for the scheme to end, it is very likely that the majority
of SBNs will come back into the system. It means that the
government’s assumption
of INR4t-5t not being deposited into the banking system is proven wrong.
What is the printing capacity of the country?
There are four printing presses in India that print currency notes. The two presses at
Mysore in Karnataka and Salboni in West Bengal are owned by Bharatiya Reserve
Bank Note Mudran Private Limited (BRBNMPL), a wholly owned subsidiary of
Reserve Bank of India (RBI). The remaining two presses at Dewas in Madhya Pradesh
(Bank Note Press) and Nashik in Maharashtra (Currency Note Press) are owned by
Security Printing and Minting Corporation of India (SPMCIL), a wholly owned
company of the Government of India.
In total, the four printing
presses in the country can
print 27b notes on a two-
shift basis (as is usually the
case) and 40b notes on a
three-shift basis.
The present capacity of both the presses of BRBNMPL is 16b pieces per year on a
two-shift basis (implying 24b pieces on a three-shift basis). These two presses
account for 60% of the total capacity in the country, implying that the two presses
of SPMCIL have a printing capacity of ~11b pieces on a two-shift basis (and 16b on a
three-shift basis). In total, the four printing presses in the country can print 27b
notes on a two-shift basis (as is usually the case) and 40b notes on a three-shift
basis.
Nikhil Gupta
(Nikhil.Gupta@MotilalOswal.com); +91 22 3982 5405
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on
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