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Ex-RBI Governor Subbarao warns govt against using unreturned notes to solve fiscal problems

He said if a quarter of the Rs500 and Rs1,000 currency notes in circulation does not come back—this is equivalent to about Rs3.5 trillion, the RBI may consider it as a windfall profit.

Former Reserve Bank of India Governor D Subbarao has warned that any move by the Indian government to treat currency that is not surrendered during the ongoing demonetization process as a profit will be “ill-advised”.

Subbarao, who was speaking at Mint Asia’s global banking conclave in Singapore, speculated that the Indian government could use the currency that is not returned to solve its fiscal problems or to recapitalise banks. He warned that any such step would send a wrong message.
“Then demonetization will be viewed as being done with other motives, rather than fighting black money,” Subbarao said.
He said if a quarter of the Rs500 and Rs1,000 currency notes in circulation does not come back—this is equivalent to about Rs3.5 trillion, the RBI may consider it as a windfall profit. By law, the central bank has to transfer all its profit to the government.
“If RBI treats this as a profit, and the Centre demands that this be transferred to it, and they use this to play Robin Hood or to recapitalize the banks, or for whatever other purposes, this will send out the wrong message. I don’t believe that this is the intention of the current government, but if they were to do such a thing, it will be highly ill-advised,” he said.

He said he was unsure about the legal position on whether the RBI could claim unreturned currency as profit. According to him, all currency notes carry a legal obligation, as the RBI has guaranteed that it will pay the bearer the sum or the value of the denomination that is printed on that note.

Subbarao said the government has not even used the word demonetisation. He questioned, “All that the government has said is that it is withdrawing these notes as being legal tender. But it still leaves us with the question: does the RBI have the obligation to pay the bearer, or is that obligation over, after the government announcement.”

He said, however, the positives of the current demonetisation drive outweighed the negatives. “The money being deposited in the banks, as against having it in the pocket, or under the pillow was good for the economy,” said Subbarao.

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