RBI signals end to cash controls

The Reserve Bank of India (RBI) is moving to end restrictions on cash withdrawals, two months on from the controversial decision to scrap two high-value banknotes overnight.

The central bank said today (January 30) that "on a review of the pace of remonetisation" it had decided to "partially restore the status quo", ending limits on withdrawals from current accounts immediately and lifting restrictions on ATM withdrawals from February 1.

Limits on savings account will continue, though they are "under consideration for withdrawal in the near future".

The central bank and government acted jointly on November 8 to withdraw the 1,000 and 500 rupee notes, cancelling their status as legal tender overnight and replacing them with new 2,000 and 500 rupee notes. The cancelled notes accounted for 86% of the value of outstanding banknotes, and cash shortages across the country led to the imposition of tight limits on withdrawals.

An initial withdrawal limit of 2,000 rupees ($29) per card per day was gradually increased as replacement notes entered circulation, most recently to 10,000 rupees on January 16. But the inability of printing presses to keep up with demand coupled with problems recalibrating some ATMs hampered the RBI's efforts at "remonetisation".

It appears the withdrawn notes have only been partially replaced so far. According to RBI data on reserve money from the week ending January 20, 9.9 trillion rupees' worth of banknotes were in circulation, an increase of 4% on a week earlier but 38% below the level at the same point in 2016.

The central bank has had to conduct additional operations to soak up the liquidity generated by India's population depositing their cash into banks, with some people opening bank accounts for the first time. Seeking somewhere to place the excess cash, banks piled into government bonds, briefly pushing down yields by as much as 50 basis points.

The RBI introduced rules requiring banks to deposit 100% of any increase in net demand and time liabilities between September 16 and November 11 with the central bank. The latest figures show that while the overall quantity of reserve money has fallen, bank deposits with the RBI are up 14.2% year on year.