A man weighing piles of cash (Photographer: Manaure Quintero/Bloomberg)

Chart: Cash To GDP Ratio Approaches Pre-Demonetisation Levels

The expectation that the Indian economy will learn to work on less cash following demonetisation is slowly coming to naught. Less than 18-months after the government decided to withdraw 86 percent of the country’s currency in circulation, cash as a percentage of GDP is nearly back at levels seen before demonetisation.

Reserve money data released by the RBI on Wednesday shows that currency in circulation is now at Rs 19 lakh crore. As a share of GDP, currency in circulation stood at 11.3 percent in April, close to the pre-demonetisation steady state of 11.5-12.0 percent of GDP, said Nomura Global Research in a report on Thursday.

Chart: Cash To GDP Ratio Approaches Pre-Demonetisation Levels

Before demonetisation, currency in circulation stood at Rs 17.98 lakh crore or close to 12 percent of GDP. The expectation was that as unused and unaccounted cash finds its way back into the system, the proportion of currency in the economy would drop.

This has not held true with currency, both in absolute and percentage of GDP terms, now back at pre-demonetisation levels.

A number of factors have contributed to the rise. The initial pick-up in 2017 was largely due to remonetisation. More recently, increased demand for cash is likely due to factors such as a faster pick-up in nominal activity and the upcoming elections in Karnataka.
Nomura Global Research