Demonetisation impact: People's currency holding habits impacted, says RBI

Topics Demonetisation

One year after the note ban, there is a significant drop in demand for currency due to a sharp rise in payments through digital means, digitisation, and changes in currency holding habits, according to a study by the Reserve Bank of India (RBI).

As on October 27, the total currency in circulation (CIC) was lower by 8 per cent on a year-on-year basis, as against an increase of 17.2 per cent last year. It is estimated that the CIC declined by around Rs 9 lakh crore between November 4, 2016 and January 6, 2017.

In an article titled “Impact of Demonetisation on the Financial Sector” in its latest monthly bulletin, the RBI says the income elasticity of currency demand between the second quarter of 2014 and the second quarter of 2017 dropped from 1.07 to 0.91. This means that as the CIC has contracted, the less cash there is to hold for every rupee increase in a person’s income.

Demonetisation “has had a significant effect on the currency holding habits of the public which, in conjunction with greater digitisation of retail transactions and the sharp increase in electronic modes of payments, may have led to a durable downward shift in the currency demand of households”, says the central bank.

According to the ‘Broad Money’ measure of money supply, or ‘M3’—which includes currency, short-term and long-term time deposits in banks, and money market funds of all types of maturity — the CIC fell to 12.3 per cent on October 13, 2017, as compared to 14.4 per cent on November 11, 2016.

Based on extensive calculations and multiple methods, the RBI staffers who authored the article have attempted to estimate how much of the cash deposits made during the November-December demonetisation period was in ‘excess’, when compared to the previous trends.

One estimate by the RBI, using certain assumptions, time-series models, and aggregate bank data, states there was an excess of 4.2 per cent in deposits growth, which translates to around Rs 3.8 trillion. Another estimate of ‘excess’ deposits, using bank account data, shows that across 52 banks and under the seven types of accounts — basic saving bank deposit accounts (BSBDA), PMJDY accounts, kisan credit card(s) (KSS), dormant or inoperative accounts, jewellery/bullion traders’ accounts, and loan accounts — which saw substantial inflows in the first two weeks of demonetisation, Rs 4.35 trillion worth of cash deposits were made during November-December 2016. During September-October 2016, the amount of cash deposited into these accounts was Rs 2.7 trillion.

Demonetisation was instrumental in inducing a strong shift, within Indian consumers and the wider public, to adopt formal channels of savings and banking, the RBI concludes.
Key takeaways

* Total currency in circulation (CIC) was down 8 per cent y-o-y

* This was against an increase of 17.2 per cent last year 

* CIC declined by Rs 9 lakh crore between Nov 4, 2016 and Jan 6, 2017

* There was an excess of 4.2 per cent in deposits growth, which translates into Rs 3.8 lakh crore

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