Return To Normalcy In Sight As RBI Lifts Cash Curbs

The Reserve Bank of India (RBI) on Monday lifted all cash curbs put in place after Prime Minister Narendra Modi invalidated old high-value currency notes on November 8 last year.

The central bank estimates that currency in circulation as on March 3 was near Rs 12 lakh crore.

With no withdrawal caps in place, spending habits are likely to revert to what they were before demonetisation, Madan Sabnavis, chief economist at CARE Ratings, said in a phone interview to BloombergQuint.

The demonetisation of Rs 500 and Rs 1,000 notes, which removed Rs 15.4 lakh crore, or 87 percent, of the currency in circulation, had led to a cash crunch and a change in spending patterns.

Three months after the curbs were put in place, the RBI announced in a notification on February 8 that the restrictions on withdrawal of cash from savings bank accounts would be removed in two stages. In the first stage, from February 20, the limit for withdrawals was raised to Rs 50,000 per week from Rs 24,000. Now, the cap has been lifted.

The RBI has already removed restrictions on cash withdrawals from current accounts.

Cash Still King?

Since demonetisation, transactions through the National Payments Corporation of India’s Unified Payment Interface have been on the rise. Provisional data released by the RBI showed that the value of these transactions have risen from Rs 90 crore in November to Rs 1,660 crore in January, and further to Rs 1,900 crore in February.

The same data set points to a decline in the volume and value in the prepaid instruments category, which also includes mobile wallets. After an initial surge in December and January to around Rs 2,100 crore each month from Rs 1,320 crore in November, the value of these transactions has fallen to Rs 1,870 crore in February.

“The higher digital transactions are unlikely to sustain,” said Sabnavis. “There is a cost involved with these transactions because at the end of the day, the service providers are running a business. Once cash is available, people will revert to using it.”

Getting The Economy Back On Track

The RBI first lowered its guidance on economic growth to 7.1 percent in December from 7.6 percent earlier, and then further reduced it to 6.9 percent in February. The overall impact of demonetisation on growth in the current financial year is estimated at 33 basis points, the Indian central bank said in a recent report.

One of the major reasons for the slowdown is the impact of the currency curbs on the cash-intensive unorganised sector, dominated by small and medium enterprises.

“Unfortunately, we don’t have any data on the informal or unorganised sector,” said Devendra Kumar Pant, chief economist at India Ratings & Research. “It will take some time for production to start again.”

In a interaction with reporters last week, RBI Deputy Governor Viral Acharya had said the process of remonetisation is likely to be completed in the next two to three months.

Sabnavis anticipates that with the curbs on withdrawals lifted and currency returning to the system, the economy could return to normalcy by July.

“The SME (small and medium enterprises) segment, which is the most cash-dependent, was the one that was worst hit. There were job losses, because payments could not be made. When there is enough cash in the system, businesses will resume,” he said.