Cash in economy settles at 12% below pre-demonetisation level

At the latest level, currency in circulation is 88 per cent of peak levels before demonetisation. NSEBSEHDFC bankLoading data…





    ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIES Currency in circulation has dipped for the second consequent week, according to data released by the RBI. This shows that cash in the economy has settled at a lower level, resulting in over Rs 2.3 lakh crore remaining with banks following demonetisation.

    Following demonetisation in November 2016, currency in circulation fell from nearly Rs 17.9 lakh crore to a low of just under Rs 9 lakh crore in January. Since then, the amount of cash in the economy has been growing week after week as the RBI’s printing presses worked overtime.

    Last two weeks, however, banks have been depositing more with the central bank than they withdrew, which is seen as an indicator that currency requirement has stabilised. Of the multiple objectives for demonetisation announced by the government, two important ones were reducing the extent of black money in the system and, second, reduce dependence on cash for transactions by promoting digital payments. Black money was expected to decline as many in the government believed that a large chunk of currency with the public would not be deposi ted with banks and would be extinguished. However, over 99 per cent of the currency has been deposited with banks.

    While the extinguishment of black money did not happen, the second objective of reduced dependence on cash seems to have been achieved. At the latest level, currency in circulation is 88 per cent of peak levels before demonetisation.

    The government has set a target of achieving 2,500 crore digital transactions per month by March 2018. As against this, the current monthly transactions are little over 1,000 crore. Besides an increase in digital payments, a slump in real estate is also seen to be reducing the demand for cash. Some lenders like HDFC Bank are rationalising their ATM network expecting lower demand for cash.

    According to RBI deputy governor Viral Acharya, one way of identifying stability in currency level was “when it bounces around its level”. “I think it is only recently that this has started happening, otherwise we have just been remonetising at an increasing rate and currency in circulation has been going up,” said Acharya.

    The reduction in currency in circulation and the consequent increase in bank deposits has led to a formalisation of savings in India. “Compared to FY2016, savings in currency as a proportion to GDP fell by 355bps to -2.1 per cent, while deposits picked up 250bps to 7.4 per cent. (100 basis points, or bps, amounts to 1percentage point.) Shares and debentures’ allocation increased by 90bps to 1.2 per cent and insurance funds’ allocation picked up by 100bps to 2.9 per cent. Financial liabilities increased by 60bps to 3.7 per cent,” said a report by Kotak Economics Research.

    (This article was originally published in The Times of India)

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