With aggressive promotion of cashless economy, electronic payments & reduced cash usage, RBI will lose the seigniorage revenue. Seigniorage is a very small share of the RBI’s net worth (about 6%) but a substantial share of its cash income, almost 100% at this juncture. Can it be compensated from some other source? True, less cash will reduce the RBI's liabilities but issued currency is a non-interest bearing liability whereas seigniorage is actual cash income.
Even in a cashless world, electronic money hinges ultimately on accounts with the central bank as the ultimate clearing instrument. In my view printing currency notes and letting them circulate will create the same amount of seigniorage for the central bank as if the identical amount is granted to an economic agent in the form of an (electronic) account with the central bank. Only if the total demand for central bank money ( in the form of cash plus electronic deposits) is affected by the abolition of cash will this affect the amount of seigniorage.
Thanks for the reply Michael. Yes, your answer seems quite convincing but I still have some doubt. Hope I can get some clarification regarding the same.
Electronic money can be circulated many times faster than conventional payment instruments as the transfer is instantaneous. In such case, the total amount of money issued & in circulation should be reduced or else there will be much more liquidity in the economy than desired. Won't such a contraction in money supply affect the central bank's revenue?
I agree. If the demand for (central bank) money is reduced, then the amount of seigniorage will also be reduced, unless the central bank pursues a policy of maximizing seigniorage at the expense of price level stability. But I do not see such an effect from the (hypothetical) abolition of cash. Even today, consumers hold most of their money in (electronic) current accounts, not in cash.
Thanks Arun. Gone through the report. A very relevant one - discusses the same dilemmas & controversies surrounding cashless payments, albeit in much more detail, as those for India discussed in one of my articles. Answers many questions & leaves many more unanswered & open for debate. Will go through it again. May provide additional insights.
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