Demonetisation - What if deposits in banks are greater than 15 Lac Crores?

On November 28th the Reserve Bank of India stated that

Banks have since reported that such exchange/deposits effected from November 10, 2016 upto November 27, 2016 amounted to ₹ 8,44,982 crore (exchange amounted to ₹ 33,948 crore and deposits amounted to ₹ 8,11,033 crore). They have also reported that the public have withdrawn, during this period, ₹ 2,16,617 crore from their accounts either over the counter or through ATMs.

The expectation was that thereafter the RBI will release similar data every Monday. On Dec. 5th, when RBI did not release the data for the week past, speculation was rife that most of the money may have actually returned to the RBI. And further that it amounts to a failure of the policy and that there is no black money at all. 

The amount forecasted / estimated by sources of journalists is Rs. 12.6 Trillion. has been deposited in banks till Dec 6. Total bank notes in circulation as of Nov. 8 was about Rs. 15 Trn. We still have about 3 weeks to go. 

The correct way to establish how much money has returned is to look at this 8.44 Tr figure. That is the focus. 

So weekly average is about Rs. 2.8 Trn as per RBI and as per Moneycontrol it is about  Rs. 3.15 Trn per week. Going by the same run-rate estimates we can get at least Rs. 19.64 Trn to Rs. 22.46 Tr. If you understand the "last-minute" psyche of Indians, I think last week will get at least twice the weekly deposits. Then you will get between Rs. 22.4 Tr to Rs. 25.2 Tr. 

Please note that these numbers are more than Rs. 5Tr  to Rs. 10 Tr more than what RBI has printed. 

So here are my thoughts on this:

1. It is OK if all the money comes back to the RBI and either gets changed or deposited in the banks. It means there won't be any disinflation because of loss of currency. 
2. If money is deposited in the bank that does not make it white money. It merely becomes visible black money as opposed to invisible black money. Knowledge of the quanta so revealed that itself is a benefit. Further, it is open for authorities to review and tax these proceeds accordingly. So it is ok if the deposits reach Rs. 15 Tr. 
3. The problem is what happens when the total deposits/exchanged amount exceeds Rs. 15 Trn. Once it reaches 15 Trn can RBI tell banks now don't accept any more notes? Or it accepts and asks Government to pay (reverse of dividend)? [Please refer to my previous blog-post on Black money and demonetisation before demonizing me.]
4. I would say, the fact that entire Rs. 15 Trn comes back itself means that the problem of Fake Indian Currency Notes (FICN) was more potent than was admitted previously. If our run-rate calculations turn out correctly, FICN could be between 33% and 66% of legitimate Indian Notes. That is not a joke. It is also a success of the Demonetisation drive.
5. I would say about 20-25% of the notes would have been definitely destroyed. But given the tax amnesty announced let us assume about 10-15% were destroyed. The black economy was estimated at 20-25%. Assuming some can be dissipated as white (through jan-dhan and other tricks) we can say at least 10% would be black. Still about 20% of the currency in circulation could be FICN. Compare this with estimates of about 2-5%. 

To top it all Modi did not ask for 50 days to clean up the black money he asked for 17 months. So there will be more action coming. This will be interesting, to say the least.

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