MUMBAI: The currency in circulation (CIC), which increased exponentially following demonetisation in November 2016, has shown unusual signs of slow down. Though the fall is a seasonal occurrence seen every July, the current fall is indifferent, coming ahead of the harvesting and festive season.
According to data collated by SBI Research, currency in circulation rose from Rs 9 lakh crore in January 2017 to Rs 19.6 lakh crore as on September 14, 2018. But since May 2018, it grew marginally between Rs 19 and Rs 19.6 lakh crore.
Typically, currency demand increases after monsoons as the harvesting begins in October, followed by Rabi sowing, eventually giving rise to cash requirement. The festive season also brings along its natural demand, which gets accentuated with buying of gold, automobiles, increasing the demand for currency, it explained. SBI Research attributes the fall to higher fuel prices and RBI’s intervention in forex market.
“One possible reason can be people may be cutting back discretionary spending with the recent spurt in fuel prices, mostly in rural areas,” it noted.
The other factor could be to the extent RBI is selling dollars directly from its forex reserves to designated dealers/banks, thereby withdrawing rupee resources in return, thus reducing currency in circulation, it explained. Such intervention, however, since it takes place between banks, should not have a major impact on systemic liquidity.
Lastly, though insignificant, it could also be RBI replacing soiled notes. The fall in currency in circulation is a seasonal phenomenon, but this time, it seems the decline is more than just seasonal and has continued beyond August. RBI’s weekly data for the last 10 years show a pattern in decline of CIC in the last fortnight of every July, which is partly explained by the low cash demand from the agricultural sector.