New Delhi: The cabinet on Wednesday cleared a draft ordinance to partly extinguish the liability of demonetized Rs500 and Rs1,000 notes from the balance sheet of the Reserve Bank of India (RBI)—a move that could potentially result in a windfall for the exchequer.

The Specified Bank Notes Cessation of Liabilities Ordinance has been sent to President Pranab Mukherjee for approval, after which it will come into effect, a government official with knowledge of the matter said on condition of anonymity.

The ordinance needs to be passed by both Houses of Parliament to become law.

Prime Minister Narendra Modi on 8 November said Rs500 and Rs1,000 banknotes would cease to be legal tender as part of the government’s fight against black money and counterfeit notes. The withdrawal of the high-value notes invalidated 86% of the value of currency then in circulation.

“Cabinet clears promulgation of an ordinance to penalise persons holding junked ₹ 500 & 1000 notes. Last date for exchanging demonetised notes to expire this Friday. After this, person can deposit old notes only with RBI up to March 31, 2017," All India Radio News tweeted from its verified Twitter handle.

There was no official communication from the government. An announcement is likely after the President approves the ordinance.

In 1978, a similar ordinance was issued to end RBI’s liability after Rs1,000, Rs5,000 and Rs10,000 notes were demonetized.

The proposed ordinance makes holding of old currencies beyond a certain threshold after 31 March a criminal offence attracting a fine of Rs10,000, PTI reported.

The government expects that a part of the Rs15.44 trillion in demonetized notes will not return to the banking system, reducing the liability of the RBI. This money can then be transferred to the government, since the central government is the guarantor behind all currencies issued by the RBI.

The central bank earlier this month said that Rs12.44 trillion worth of demonetised notes had returned to the banking system by 10 December. The finance ministry disputed the figure, claiming there may have been double counting.

At his bimonthly post-policy conference with the media earlier this month, replying to a query, RBI governor Urjit Patel said that only withdrawing the legal tender status of Rs500 and Rs1,000 notes does not reduce the liability on the RBI balance sheet, ruling out an immediate windfall gain to the government through a special dividend as a result of demonetization. Experts said an amendment to the RBI Act through an ordinance will pave the way for a one-time fiscal transfer from the RBI to the government.

“The government should use this money to stimulate demand in the economy," said D.K. Srivastava, chief policy adviser at EY India. “While pre-demonetization, there was investment contraction, post-demonetization, the economy is also experiencing consumption contraction. The budget should focus on revival of demand in the economy as private sector will take time to respond."

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