Indians Are Still Stocking Up On Cash, But At A Slower Pace
The economic implications of the second wave of the Covid-19 pandemic have varied from what was seen last year. Lockdowns have been staggered across regions, rural India is worse hit, mobility is down but manufacturing is faring better.
One other shift, as observed so far, is that Indians aren’t rushing to hold precautionary savings in cash as much as they did last year. As a result, the spike in currency in circulation seen during the first wave last year is absent so far this year.
Currency in circulation rose to Rs 29.6 lakh crore for the week ended May 14, 2021, according to data from the Reserve Bank of India. It rose by Rs 1.8 lakh crore between the start of the year to mid-May, compared to a rise of Rs 3.2 lakh crore in the same duration the last year.
Between March and mid-May, currency in circulation rose by Rs 2.4 lakh crore last year compared to Rs 1.2 lakh crore this year. While India went into a nationwide lockdown on March 25 in 2020, this year, large states like Maharashtra started announcing lockdowns in April.
On an annual basis, the pace of growth in currency in circulation decelerated for the twelfth straight week, rising 14.2% year-on-year in the week ended May 14, 2021, according to the central bank’s data.
This was the slowest pace of growth in over an year.
To be sure, growth in currency in circulation remains well above trend and a high base would play in a role in decelerating growth.
The sharp spike in currency in circulation was led by precautionary motives and also resulted out of government cash transfers, said Soumyajit Neyogi, associate director at India Ratings and Research. This time, lower incremental requirement of cash, no government cash transfers and lesser reverse migration has meant lower growth of currency in circulation, he said.
Rahul Bajoria, chief India economist at Barclays, said there may be a decline in the fear factor. Also certain businesses being permitted to continue operations even amid localised lockdowns may be easing currency demand.
However, Bajoria expects that as lockdowns have intensified in May, growth in currency in circulation might once again see a rise. Seasonal factors such as the onset of the kharif season might also add to that, with the agricultural economy continuing to remain cash intensive, Bajoria added.
Money Supply Growth Slipping
Growth in broader money supply in the economy is also easing from levels seen last year.
Narrow money or M1 as it is known in technical parlance, which includes currency with public and demand deposits, is growing at 16.2%. But broad money or M3, which includes time deposits as well, is growing at 10.6% annually. The latter is the broadest measure of money supply in the economy.
To be sure, at near 11%, money supply growth is still strong and above long term averages.
There are a number of reasons for slowing money supply growth in the economy.
Liquidity operations by the central bank and the expansion of its domestic balance sheet drove up money supply last year. This year, CRR hike has remained a drag on money supply, said Bajoria. Slowing forex inflows have also played a role in lower money supply growth, he added. With slowing inflows, the RBI buys less foreign exchange and does not release additional liquidity.
A key reason, however, continues to be the low money multiplier, which reflects the pace at which an initial deposit converts into the broader supply of money via bank lending.
In India, the money multiplier is at a near nine-year low, largely due to weak growth in bank credit.
Slowdown in M3 growth is a symptom that credit growth is languishing, said Niyogi. The slowdown is largely because of muted credit, he said. The easing in these indicators may also be reflective of income and wealth erosion, Niyogi said.