Rs 2,000 notes' parting gift: Growth in currency in circulation dips to a decade-low

The value and volume of banknotes in circulation increased by 3.9% and 7.8%, respectively, during 2023-24 compared with an increase of 7.8% and 4.4%, respectively, a year ago.
Express Illustration
Express Illustration

The value of banknotes in circulation increased by 3.9% in FY24 -- the lowest in the past one decade -- according to latest RBI data.

Over the last ten years, the growth in currency in circulation often stood in double digits, with FY17 being an exception when it registered a de-growth thanks to demonetisation.

The central bank estimates the demand for currency using econometric models, and factoring in real GDP growth prospects, rate of inflation and disposal rate of soiled notes denomination-wise. In FY24, however, as as RBI rolled back the pink notes from circulation, the need for expansion in banknotes remained next to nothing.

"Currency in circulation is usually a predominant driver of structural liquidity in the banking system. The usual expansion in currency in circulation during 2023-24 was muted due to the return of currency to the banking system on account of the decision to withdraw ₹2000 banknotes from circulation on May 19, 2023," RBI said in its Annual Report 2023-2024, released Thursday.

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The value and volume of banknotes in circulation increased by 3.9% and 7.8%, respectively, during 2023-24 compared with an increase of 7.8% and 4.4%, respectively, a year ago. The value of banknotes saw the lowest-ever expansion over the past ten years, while the volume of banknotes registered the second-lowest increase in a decade.

Typically, the value and volume of banknotes expansion follows a trendline increase, but it bucked the trend due to demonetisation in November, 2016. If the value of banknotes in circulation plunged 20.2% during FY17, their volume, however, increased by 11.1%, mainly due to higher infusion of banknotes of lower denomination. Likewise, the following year saw a dramatic increase in the value of banknotes at 37.7% during FY18, while the volume saw a dismal growth of 2.1%.

Barring these two years, the value of banknotes in circulation also saw diverging trends pre and post-pandemic years. If the value of banknotes largely saw double digit growth prior to the pandemic, it fell to single digits post-pandemic. As for the rise in volume of banknotes, they remained in single digits throughout.

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For instance, currency in circulation grew by 10.1% in FY14, 11.4% in FY15, 14.9% in FY16, (a de-growth of 20.2% in FY17), 37.7% in FY18, 17% in FY19, 14.7% in FY20, and 16.8% in FY21. However, the growth pace fell to single digits to 9.9% in FY22 and 7.8% in FY23.

Likewise, the volume of banknotes 5.2% in FY14, 8.1% in FY15, 8% in FY16, 11.1% in FY17, 2.1% in FY18, 6.2% in FY19, 6.6% in FY20, and 7.2% in FY21. However, the growth pace fell to single digits to 5% in FY22 and 4.4% in FY23.

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