High cash in circulation aids current RBI policy – Times of India

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MUMBAI: India ranks number three in terms of usage of banknotes with only Japan and Hong Kong having a higher ratio of currency-in-circulation (CIC) to gross domestic product (GDP).
According to a report by the Reserve Bank of India (RBI), high denomination notes are not being used for payments but as a store of value, especially in times of uncertainty like the Covid pandemic. As of June 24, currency-in-circulation stood at Rs 32.2 lakh crore. This was a dip of Rs 9,343 crore over the week and an increase of Rs 83,729 crore during the current financial year so far. The currency per capita works out to Rs 22,752, which is a pointer to hoarding of cash.
According to a report by the Reserve Bank of India (RBI), only Hong Kong (21.3%) and Japan (22.9%) have a higher ratio of currency-in-circulation (CIC) as a percentage of GDP compared to India.
“A low crime rate, years of ultra-low interest rates and a nationwide network of ATMs have made cash appealing in Japan, giving people few reasons to shift to other modes of payments,” the central bank has said in a report.
The central bank’s report on benchmarking India’s payment systems compares various parameters relating to payments for 21 countries. According to the report, CIC in India increased to a high of 14.4% of GDP in 2020-21 from 10.7% of GDP in 2017-18, consistent with the trend observed across jurisdictions. Only China and Turkey witnessed a decline in the CIC as percent of GDP in 2020 compared to 2017.
“With the onset of Covid pandemic, there was a dash for cash across all jurisdictions. Lockdowns were severe in India, as a result of which economic activity was impacted and there was steep contraction in GDP, relative to other countries. The decline in GDP (denominator) contributed considerably to increase of CIC as percent of GDP for India in 2020,” the RBI report said.
High CIC helps the RBI in its current policy objective of tightening liquidity in the banking system. If CIC dips by 10% with people returning the money they withdrew in the last two years into bank accounts, it would flood the banking system with over Rs 2 lakh crore of additional deposits. However, in the long run, the policy objective is to reduce the dependence on cash in favour of digital.


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