Gold Silver Reports (GSR) – Did Demonetisation Change India’s Cash Habits? — Currency in circulation stood at Rs 18.4 lakh crore as on April 6, 2018. In absolute terms, this is above the Rs 17.98 lakh crore in currency that existed before demonetisation.
As a percentage of GDP, cash is currently at 10.8 percent of FY18 nominal GDP compared to 12 percent before demonetisation. The gap is assumed to be a change in consumer preference for cash. The Economic Survey released on Jan. 28, said that the cash-to-GDP ratio had stabilised at lower levels. In absolute terms, cash was lower by Rs 2.8 lakh crore or 1.8 percent of GDP, estimated the Economic Survey.
However, over the last few months, the pace at which currency in circulation is growing has picked up.
“Analysts, for a while, had spotted a sharp rise in cash, particularly in December – January ’18, a puzzling phenomenon, largely unexplained beyond the standard suspects – elections, kharif crop marketing, etc…This trend seems to have persisted in the first 2 weeks of FY19,” wrote Saugato Bhattacharya, chief economist at Axis Bank in a note on Friday.
Is the increased demand temporary? Or does this suggest that the preference for cash, for some reason, is moving closer to pre-demonetisation levels? It is tough to conclude that with any certainty. However, if that is indeed the case, then there may be some aggregate shortage of cash in the economy.
R Gandhi, former deputy governor of the Reserve Bank of India told that based on pre-demonetisation trends, currency in circulation should have been at close to Rs 23 lakh crore compared to the Rs 18 lakh crore right now. “That Rs 5 lakh crore difference is because of people having shifted from cash to bank deposits. If we assume that people have moved back to cash (that is an assumption), then there would be a shortage. But estimating that is not easy,” Gandhi said.
Neelkanth Mishra of Credit Suisse also pointed out that the Rs 45,000 crore rise in currency in circulation is the lowest since 2013. As a percentage of GDP, it is lowest in nearly 10 years. Could this suggest that growth in currency is not keeping pace with the typical pick-up in demand, leading to a shortage? – Neal Bhai Reports
