Four years since demonetisation: Cash in system steadily rising, at all-time high

After Rs 500 and Rs 1,000 notes were withdrawn from the system in November 2016, currency with the public, which stood at Rs 17.97 lakh crore on November 4, 2016, declined to Rs 7.8 lakh crore in January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

Four years after the government announced demonetisation on November 8, 2016, the currency with public for the fortnight ended October 23, 2020 stood at a record high of Rs 26.19 lakh crore — up 45.7 per cent or Rs 8.22 lakh crore from a level of Rs 17.97 lakh crore on November 4, 2016. In the fortnight ended October 23, 2020, the currency with public rose by Rs 10,441 crore to hit a new high.

After Rs 500 and Rs 1,000 notes were withdrawn from the system in November 2016, currency with the public, which stood at Rs 17.97 lakh crore on November 4, 2016, declined to Rs 7.8 lakh crore in January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

Cash in the system has been steadily rising, even though the government and the Reserve Bank of India (RBI) pushed for a “less cash society”, digitisation of payments and slapped restrictions on the use of cash in various transactions.

Opinion | On demonetisation, take the long view

However, the pace of rise in currency with the public has been very sharp over that last 10 months as it has risen from Rs 21.79 lakh crore as on January 3, 2020 to Rs 26.19 lakh crore as on October 23, 2020.

The jump was primarily driven by a rush for cash by the public between March and May as the government announced stringent lockdown to tackle the spread of the Covid-19 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 definition, currency with public is arrived at after deducting cash with banks from total currency in circulation. Currency in circulation refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses.

Earlier, the sudden withdrawal of notes in November 2016 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.

However, a senior banker said 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. But this would have gone up of late with the decline in the growth,” he said.

According to an RBI study on digital payments, 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.

“Several anomalies, however, are visible in the trend: first, the spread and intensity of use of digital payments does not seem to have any specific relationship with how developed a country is,” the RBI study said. “An increase in digital payments to GDP ratio over a period of time does not seem to automatically imply a fall in the currency to GDP ratio of the country,” it added.

Cash transactions through ATMs were also rising steadily. From Rs 2,00,648 crore in January 2017, debit card transactions through ATMs and PoS (point of sale) terminals rose to Rs 2,37,778 crore in August 2020, as per the Reserve Bank data.

Unified Payments Interface (UPI) transaction volume declined by 5.9 per cent in March 2020 and further by 19.8 per cent in April 2020 to slightly less than one billion transactions. However, it recovered as the lockdown was gradually lifted.

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