Post demonetisation, windfall gain for RBI?

The government’s move to pull out Rs 500 and Rs 1,000 notes from circulation could result in a windfall gain for the Reserve Bank of India ( RBI) as it will reduce the central bank’s liabilities to the extent that the old notes do not come back into the system.

The central bank could gain as much as Rs 6 lakh crore, assuming that even less than half of the notes valued at Rs 15 lakh crore do not come back to RBI for payment.

However, to adjust its balance sheet, RBI will have to compensate its asset side by transferring the amount of lower liabilities to reserves

It is only when these reserves are transferred to RBI’s profit and loss account will the central bank’s income increase and it can pay this amount as dividend to the government.

Even without dividend, reserves could be transferred to government if the board approves.

Pure monetarists may argue it should remain with RBI for prudence. But the counter view is that these gains are from government action and not RBI’s earnings.