The Indian Express unpacks the issues around the crunch, and why it may not be that unusual.
Why is there a shortage of cash in ATMs in some states?
There could be a combination of factors. Some of these include the printing of Rs 2000 notes in smaller numbers, the conversion of Rs 2000 cassettes in ATMs to Rs 200 cassettes, which has reduced the machines’ cash-carrying capacity; hoarding of cash by the public ahead of festivals; a mismatch between the growth of currency in circulation with the growth in economic activity in the 18 months since demonetisation; and the return of cash transactions, with an increase in the average ticket size of ATM withdrawals since pre-demonetisation days.
“As we understand from various sources, the printing of Rs 2000 denomination notes has been less, with more emphasis on printing of lower-value notes. ATM transactions have been steadily increasing, though not at the heady pace we saw from 2012-16. They have definitely come back to the pre-demonetisation days. The ticket size has also increased from Rs 2,900 to Rs 3,100 across our portfolio of ATMs,” said Radha Rama Dorai, MD, ATM and Allied Services, at FIS, one of the leading firms managing ATMs in India.
How does the Reserve Bank of India decide how much cash is required?
Early every calendar year, before the start of the fiscal, the RBI holds a meeting to calculate the country’s annual cash requirement. It works on an econometric model that takes into account variables such as the number of notes in circulation, the number that have been destroyed, and the number needed for replacement — all keeping an eye on projected GDP growth and inflation for the coming fiscal, and on the volume of electronic transactions, including fund transfers and payments through cards, during the past year. The RBI collects data from its 19 regional offices, and then decides on how much currency to allocate to each office — remittances are generally made quarterly. The Ministry of Finance, whose Coins and Currency Division oversees the exercise, is then intimated. Officials said the amount of currency to be printed in a year is a closely guarded secret between the RBI and the Ministry. Based on the estimate of currency needed, an indent or order is placed with the country’s four currency note printing presses, with clear instructions on denominations and numbers of notes each would print.
And how is this cash crunch different from the one after demonetisation?
During demonetisation there was a cash crunch not just at ATMs but also in bank branches as currency notes of Rs 1000 and Rs 500 were withdrawn from the system, and new notes were yet to come in sufficient numbers. This time, the cash crunch is only at ATMs, suggesting a role for possible logistics issues. At the time of demonetisation, banks had surplus deposits as the public, including likely hoarders of black money, deposited old high-value notes. But with gradual remonetisation over the last year, deposits could have reduced, even as withdrawals increased — which, in conjunction with other factors, may have contributed to a temporary cash crunch.
So, how should this crunch be viewed?
Rama Dorai of FIS stressed that “different states have seen cash crunches at different times, and this is not in itself a new phenomenon”. Economist and India Equity Strategist for Credit Suisse, Neelkanth Mishra, said that it was not “unusual” for currency demand to rise in the first half of April. “A study of historical trends shows there is nothing unusual in this trend — the increase is the lowest since 2013, and as % of GDP, it is the lowest in nearly 10 years,” Credit Suisse said in a note issued late Tuesday evening. The note added that “currency in circulation as % of GDP has not yet settled into the normal seasonal pattern, and it is possible that the government stopping the printing of Rs 2,000 denomination notes may have caused some concern, and triggered some hoarding”.
According to Mishra, from the government’s perspective, high-denomination notes as percentage of the cash in circulation has perhaps settled at a higher level than it was pre-demonetisation, and this is an attempt to reduce or re-normalise it. “To address shortages at ATMs, the challenge thus is distribution rather than currency availability, and should dissipate,” the Credit Suisse note said.