Demonetisation: A month after move, why are we still strapped for cash?

RBI says it has released only Rs 4 lakh crore but banks have received Rs 11.55 lakh crore in deposits from the public; 65% currency remains unreplaced

Even as India grapples with an acute shortage of currency notes, Reserve Bank of India (RBI) Governor Urjit Patel on Wednesday announced that Rs 4 lakh crore (19.1 billion notes) had been injected into the system. The crunch might go on for longer, considering that it could take several more months before the RBI plugs back the Rs 14.48 lakh crore that went out of circulation. 

This leaves an astounding Rs 10.5 lakh crore (70% of currency) still left to be supplied.

The RBI also stated that Rs 11.5 lakh crore of the illegal tender had been deposited by the public in banks. Assuming that the RBI is planning to replace only the value of notes it has received so far, it would still leave Rs 7.5 lakh more to be injected into the system. That means an estimated 65% of the money taken out of circulation still remains to be replaced one month after demonetization.

 

This probably explains why the cash shortage across banks is still persisting across the country, with long queues at bank branches and dysfunctional ATMs a constant sight. 

The RBI, however, has not kept track of how much of the Rs 4 lakh crore pumped back into the system is being disbursed by banks to customers. Many customers have complained that banks have been running out of cash within a few hours of opening every morning.

According to a Credit Suisse report, Rs 1.5 lakh crore had been released into the system till on November 25. With today’s announcement, the RBI has officially stated that only Rs 4 lakh crore is back into the system. 

So ideally, the RBI is releasing only a third of the cash that is being deposited back into the system in the form of illegal tender of Rs 500 and Rs 1,000 denomination notes. This means that though the printing of new currency started two months ago, in September, the paucity of cash in India may take a while to go.

In its monetary policy review on Wednesday, The RBI further said: “The withdrawal of old high-value currency notes could transiently interrupt some part of industrial activity in November-December due to delays in payments of wages and purchases of inputs, although a fuller assessment is awaited.”