Currency in circulation (CIC) has jumped by 19.14 per cent to a record high of Rs 21.41 lakh crore as on March 15, 2019 from the pre-demonetisation level of Rs 17.97 lakh crore on November 4, 2016, indicating that cash is back in the reckoning in the financial system.
Despite the rise in digital transactions, CIC has increased by over Rs three lakh crore in the last one year from Rs 18.29 lakh crore in March 2018, according to the latest data available from the Reserve Bank of India (RBI). After Rs 500 and Rs 1,000 notes were withdrawn from the system in November 2016, CIC had fallen to around Rs 9 lakh crore on in January 2017. Cash in the system has been steadily rising even though the government and the RBI pushed for a “less cash society”, digitization of payments and slapped restrictions on the use of cash in various transactions. Officials were citing the high level of cash in the system, counterfeit notes and black money as reasons for demonetisation.
Cash in system rising, while govt push for 'less cash'
Cash in the system has been steadily rising even though the government and the RBI pushed for a “less cash society”, digitisation of payments and slapped restrictions on the use of cash in various transactions. With Lok Sabha elections around the corner, currency in circulation is expected to rise further. After rising close to Rs 3.50 lakh crore from the pre-demonetisation level, it continues to rise even now.
According to bankers, cash in the system normally increases before the elections. The demand for currency also increases after the monsoons as the harvesting begins in October followed by Rabi sowing, eventually giving rise to cash requirement. The festive season also brings along its natural demand, which gets accentuated with buying of gold, automobiles, increasing the demand for currency.
The Annual Report of the RBI for 2018 says the reserve money growth was driven primarily by the expansion of currency in circulation as the pace of remonetisation quickened and eventually, the pre-demonetisation level of CIC was exceeded in March 2018.
Consequently, the velocity of CIC declined gradually, converging to its long-term trend. Driven largely by private sector banks, credit growth revived from a historic low in 2016-17 and crossed double digits from December 2017, re-emerging as a significant source of financing for the commercial sector.
Additionally, heightened economic activity beginning Q4 of FY18 has meant that the demand for working capital cycle has changed for the better resulting in more usage of cash for transactional purposes. This may have also prompted more withdrawals at the ATM to support the same level of currency demand. This has amplified over time and is known in the supply chain literature as the Bullwhip Effect, said an SBI Research report.
After Rs 500 and Rs 1,000 notes were withdrawn from circulation on November 8, 2016, the Annual Report of the RBI for 2018 said nearly all of that money had come back to the banking system. The RBI received Rs 15.310 lakh crore of Rs 500 and Rs 1000 notes, or 99.3 per cent of Rs 15.417 lakh crore worth of notes which were in circulation as on November 8, 2016, when the government announced demonetisation.
Cash transactions through ATMs were also rising steadily. From Rs 200,648 crore in January 2017, debit card transactions through ATMs and point of sale (PoS) terminals rose to Rs 295,783 crore in January 2018 and Rs 316,808 crore in January 2019, according to the RBI data. Of Rs 3.16 lakh crore debit card transactions, Rs 2.66 lakh crore was withdrawal through ATMs. The value of monthly transactions made using the Unified Payments Interface (UPI) crossed the Rs 1-lakh crore mark for the first time in December 2018, data released by the National Payments Corporation of India (NPCI) says.
Significantly, banks are now witnessing a lower deposit growth. Credit growth at 14.6 per cent has outpaced deposit growth at 9.8 per cent. If credit growth continues to outpace deposit growth, then scheduled commercial banks reliance on bulk deposits is likely to increase which could lead to a higher cost of funds along with increasing volatility in the asset-liability structure of banks, says a report by India Ratings.
The RBI says retail payments have grown by nearly 45 per cent in volume and 30 per cent by value during 2017-18. Retail payment systems in India are characterised by large volumes and this makes it necessary that the systems are available whenever and wherever they are required. If these systems are to deliver at the desired levels of expectations, then there is a need to focus on certain key essential features of ‘excellence’, the regulator has said.