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Markets will remain closed on 1st May, 2017 on account of Maharashtra Day.

What Does Surge in Currency with Public Reveal?
Mon, 11 Jul Pre-Open

The total currency with the public includes the following:

  • Currency note in circulation issued by the Reserve Bank of India.
  • The Number of rupee notes and coins in circulation.

It is important to note that cash reserves with the banks have to be deducted from the value of the above in order to arrive at the total currency with the public. In short, currency held by the public is the difference between the currency in circulation and bank cash vault cash.

With this basic background about the currency with the public, let's dig deeper to find out what is happening in an Indian economy.

As per the latest data from Centre for Monitoring Indian Economy (CMIE), in June 2016, currency in circulation increased 15.8%, up from 14.8% in the previous month. This growth is higher than that in March and April 2016.

Increasing currency holding with the public

Back in March 2016, currency in circulation has increased 15.3% in the month of March, the highest YoY increase in a month since May 2011, ahead of state elections in Assam, Kerala, Tamil Nadu, West Bengal and Puducherry.

There are no elections in the near future. Similarly, there is a surge in card payments as well as a jump in bank accounts due to the Jan-Dhan Yojana.

Then the big question is why growth in currency with the public accelerating?

One reason is an increase in demand for gold because of global risks. And since a large part of the transaction in the yellow metal takes place in cash, there has been an increase in currency with public. Also low interest rates make financial savings less attractive and investors tend to move to real assets like gold and real estate.

Apart from that, there is still uncertainty on inflation. Although inflation has come down, inflation expectation among the public has not come down. This leads households to keep more cash for transactions. Similarly, with low returns on most assets, the opportunity cost for holding cash and loss of opportunity due to moving to cash is low.

Another reason could be stringent rules set by the government to curb the flow of black money in the system.

Is this a structural change in the economy, which suddenly requires more currency? As per Raghuram Rajan, the RBI governor, it is temporary change rather than permanent.

More currency with the public could be one of the reasons for low deposit growth. If the trend of higher currency in circulation continues, whatever may be the contributing factors, it will not only hurt the deposit growth of banks but also make transmission of interest rates difficult.

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