A simple way of looking at RBI’s gain on the Current Demonetisation.
Let us assume that RBI prints new currency equivalent to the old currency going out of circulation (as they have to give the new currency to everybody who comes with the old currency to RBI)
At the end of March 2017, let us assume X lakh crore in value of this currency is lying with the RBI as the old note holders have not come forward to claim them.
Now on 31st March, RBI has two issues before itself:
a) How to account for this currency lying with itself? and
b) How to use this currency lying with itself?
a) On accounting, let us take the conservative approach (accountants always take the conservative approach!) and assume that RBI cannot repudiate this liability or guarantee that they have given. They have to pay the bearer whenever the bearer comes to them.
In this case, the accounting would be Currency in Hand on the Asset side and Liability on Unclaimed Notes on the Liability side.
b) Now, the issue remains - what to do with this Currency in Hand of X lakh crores? Since, there are good chances that the liability on this may not be claimed, RBI can use this almost as if it’s equity. They cannot give a dividend on this to the GOI as it is technically not a profit. GOI cannot use this money to recapitalise the banks. However, RBI can invest in Special Bank Recapitalisation Bonds eligible as Tier I Capital without any limits (Banks allowed to do this one time as per a notification from RBI - entirely within the purview of RBI). The suggested structure of these Bonds is that they are perpetual in nature, carrying a variable rate of interest equivalent to say the Repo Rate.