Currency in public hands surges

November 13, 2017 12:00 am | Updated 04:54 am IST - Mumbai

Growth in bank deposits slows to levels seen prior to demonetisation

Rapid remonetisation, coupled with the introduction of the Goods and Services Tax, may have reversed some of the progress made towards a less cash economy — one of the objectives of the demonetisation exercise of last year. Currency in the hands of the public registered a robust growth after the new tax system was rolled out in July.

According to data from the Reserve Bank of India, currency with the public, which was growing at 14.7% on a year-to-date basis till June, gained momentum from July — the month when GST was introduced. Between March 31 and October 27, currency in the hands of the public grew 22.5% as compared with 6.6% a year earlier. The data shows currency with the public was Rs. 12.64 lakh crore at the end of March and had grown to Rs. 15.48 lakh crore as on October 27.

The rapid pace of remonetisation was cited as one of the main reason for the growth in cash with the public. Also, economists said the GST roll-out could be another reason as small traders are now holding more cash.

‘Traders hold more cash’

“Now, with the process of remonetisation almost complete, transaction demand for cash has returned,” Rupa Rege Nitsure, group chief economist, L&T Finance Holdings.

“We are seeing this in increased cash withdrawals from the banking system, impacting deposit growth adversely. Also, due to GST implementation, it seems several small businesses have returned to the cash economy. This too might have impacted the overall deposit growth,” she said.

Deposit growth in banks was 9.2% till October 27 — exactly the same level as last year. Following the withdrawal of Rs. 500 and Rs. 1,000 notes, there was a surge in deposit growth, which went up to 14.7% in January. On the other hand, Credit growth, which dipped to 5% in January, improved to 7.2% year-on-year till October 27, though still below the 8.7% growth seen in October 2016.

“As remonetisation is taking place, people have increased cash holdings which is reflected in ‘currency with the public’ component of RBI data,” said Madan Sabnavis, chief economist, CARE Ratings. “The 10% difference in currency in circulation as of date and last year will continue into November when demonetisation was introduced... this can be interpreted as being the surplus funds with households over and above what is held traditionally, which has found their way into deposits,” he said.

RBI data shows currency in circulation was Rs. 16.35 lakh crore on November 3, this year compared with Rs. 17.94 lakh crore on November 4 last year, just before demonetisation was announced. So, about 90% of the currency of the pre-demonetisation levels has come back into circulation.

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