 "Currency in circulation markedly up")
The recent increase in currency with the public is confounding economists, as by the numbers it seems the citizenry is hoarding cash in a falling inflation climate.
At a time when a majority of Indian households hold a bank account, after the Pradhan Mantri Jan Dhan Yojana, the preference to keep cash handy could be a strong indication of a booming consumer sector but that largely is not the case. Generally, cash in circulation should increase when prices are on the rise at a faster clip and should fall with a slowing of inflation.
“However, with inflation on the decline and under control... the question is whether such a high currency demand basically reflects uncertainty about the prospects of the economy,” State Bank of India Chief Economist Soumya Kanti Ghosh wrote in an article in this newspaper on March 23.
Currency in circulation at the end of 2015-16 on Thursday had risen 15.7 per cent to Rs 2,26,630 crore from Rs 145,080 crore a year before, a rise of Rs 82,000 crore. The growth was 11.2 per cent a year before. Yet, Consumer Price Index-based inflation was 5.18 per cent in February, down from 5.69 per cent in January. The Reserve Bank of India’s own target is to contain inflation below four per cent in the medium term, which economists say is achievable.
Could the impending elections in states be responsible for a large part of it? Economists say it's possible. Axis Bank Chief Economist Saugata Bhattacharya certainly thinks so.
“The very sharp rise in cash leakage of Rs 52,000 crore since early March suggests this might be related to the announced state polls, corroborated, at least partially, by the spike in cash around the time elections in October 2015. If this theory is correct, cash leakages are likely to be lower in FY17,” he said.
One hypothesis is that state governments could have stepped up drought relief expenditure and so, rural areas are seeing a spike in cash balances.
Or that banks’ lending to small enterprises have reduced to an extent, causing a diversion to informal sources of credit, more cash-oriented.
Gaurav Kapur, the India economist at RBS, said the recent rise in gold prices could mean the general public could be taking money away from the banking channel to invest in the yellow metal. Payments for the rural jobs guarantee, MGNREGS, and the penchant for physical savings could also be factors.
An interesting factor could be that the cash in circulation could be something that is already in institutions but not in banking channels. For example, the mutual funds segment, which had a fairly good year in terms of collection, could have created the deficit in bank numbers, said Kapur.
Some economists also say that cash in hand aids in tax avoidance in the absence of a record and, thus, people would prefer this route ahead of the financial year-end and elections.
