By Abheek Barua and Tushar Arora
Abheek Barua is Chief Economist and Tushar Arora is Senior Economist at HDFC Bank.
At the outset, we must point out that it is difficult to say anything about the current cash crunch with certainty due to a lack of complete and up to date data. While in general, the narrative in the market has been around ‘unusually’ high demand, there are findings which suggest that some degree of ‘incomplete-remonetisation’ is also a problem.
Undoubtedly, the demand for cash has been high in the last three months. Let’s look at ATM withdrawals as a proxy indicator in this regard. The average level of cash withdrawn per debit card transaction at ATMs declined from Rs 3,029 before demonetisation (Jan-Oct 2016) to as low as Rs 1,347 after the government’s decision to withdraw 86 percent of the cash in the economy.
The level of cash withdrawal picked up to an average level of Rs 3,182 in 2017 and as per the latest data stood at Rs 3,446 in February 2018 – that is even higher than the pre-demonetisation peak.
Another way to gauge the demand for cash is to look at the seasonal pattern of ATM withdrawals. Historical data for the period 2011-15 (excluding the demonetisation phase) shows that withdrawals tend to decline in the last quarter of a financial year. That is, on average between January and March, ATM withdrawals decline by around 1.7 percent every month. This time, due to higher demand for the cash, this decline has been much less. While data for March is not available yet, we won’t be surprised if, for the quarter as a whole, ATM withdrawals might even show an uptick (the yellow bar in the table below could turn positive once the final data is available for March).
On the other side, to understand the supply side of the story, it is important to gauge the degree of remonetisation that has taken place so far. Before demonetisation, currency in circulation in India was around 12 percent of GDP. Following the demonetisation exercise, this ratio slipped to 6.3 percent. With currency infusion, while the ratio has picked to 11 percent, it still stands below its pre-demonetisation peak. What this means is that cash infusion has not kept pace with the rising inflation and GDP growth in the economy.
In absolute terms, this shortage seems to be around Rs 1.7 lakh crore.
Given the push towards digitisation, part of this shortfall in currency could have been compensated by other payment platforms (UPI, mobile banking, wallets etc.). However, as evident from the data, cash crunch coincided with a drop in the usage of digital modes of payment.
Prima facie, it appears that transactions of mobile wallets dropped significantly due to stricter know-your-customer norms that the Reserve Bank of India instituted last October. Notably, the last date for completion of the KYC involving linking of Aadhaar card and PAN card to the e-wallet mobile applications was February 28.
According to data provided by the RBI and National Payments Corporation of India, the total transaction value of all electronic payments surged to Rs 131.95 lakh crore in January and then dropped by 13 percent to Rs 115 lakh crore February.
This possibly aggravated the problem of the cash crunch in the economy.
Therefore, the quantum of cash that the RBI needs to infuse in the system depends on two important aspects – 1) how much of the current demand can essentially be met through the digital payment platforms, and 2) is the recent decline in digital usage temporary (likely due to KYC norms) or is this the beginning of a trend?
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