Nearly 5 years since note ban: Cash with public rising, at all-time high

After Rs 500 and Rs 1,000 notes were withdrawn in November 2016, currency with the public, which stood at Rs 17.97 lakh crore on November 4, 2016, declined to Rs 7.8 lakh crore in January 2017.

Cash in the system has been steadily rising, even though the government and the RBI have pushed for a “less cash society”, digitisation of payments and imposed restrictions on the use of cash in various transactions.

The jump was primarily driven by a rush for cash by the public in 2020 as the government announced stringent lockdown to tackle the spread of the Covid pandemic. As nations around the world announced lockdowns in February and the Indian government also prepared to announce lockdown, people began accumulating cash to meet their grocery and other essential needs that was being mainly catered by neighbourhood grocery stores.

As per the RBI’s definition, currency with public is arrived at after deducting cash with banks from total currency in circulation (CIC). CIC refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses.

The sudden withdrawal of notes in November 2016 had roiled the economy, with demand falling, businesses facing a crisis and gross domestic product (GDP) growth declining nearly 1.5 per cent. Many small units were hit hard and shut shutters after the note ban. It also created a liquidity shortage.

The rise in currency in circulation in absolute numbers is not the reflection of reality. “What needs to be taken into account is the currency to GDP ratio, which had come down after demonetisation,” said a banker.
The cash in circulation to GDP ratio has been 10-12 per cent till about FY20. However, post the covid-19 pandemic and due to the growth of cash in the ecosystem, CIC to GDP is expected to inch up to 14 per cent by FY25. The RBI’s own view of CIC suggests that there is little or no correlation between CIC and digital payment penetrations and that CIC will grow in line with nominal GDP.

Although digital payments have been growing gradually in recent years, both in value and volume terms across countries, the data suggests that during the same time currency in circulation to GDP ratio has increased in consonance with the overall economic growth, according to an RBI study on digital payments.

Rajiv Kaul, chief executive officer, CMS Info Systems, said cash in India continues to be the dominant medium of transactions, across regions and income groups. In FY21, the CMS network moved over Rs 9.15 lakh crore in currency through over 63,000 ATMs that the company replenishes and over 40,000 retail and enterprise chains, he said.

During the festival season, the cash demand remains high as a large number of merchants still depend on cash payments for end-to-end transactions. Cash remains a major mode of transaction with about 15 crore people not having a bank account. Moreover, 90 per cent of e-commerce transactions use cash as a mode of payment in tier four cities compared to 50 per cent in tier one cities.

The CMS Cash Index shows significant increases of cash requirement in the economy with the onset of festive season as has been happening in the past three years since 2018. CMS Cash Index showed a jump of 9-19 per cent in cash in the last three years, CMS Info said.