Cash-to-GDP ratio close to pre-Nov ’16 demonetisation levels

MUMBAI: Less than 18-months after demonetisation, the cash-to-GDP ratio is back to the levels seen before the ban on high-denomination currency notes announced in November 2016. As a percentage of GDP, currency in circulation was at 11.3 per cent as on April 27. This is close to the pre-demonetisation levels of 11.5-12 per cent of GDP, according to Nomura Global Research. Prior to the note ban, currency in circulation stood at Rs 17.98 lakh crore, or close to 12 per cent of GDP.

“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 faster pick-up in nominal activity and the upcoming elections in Karnataka,” Nomura said in a note issued on Thursday.
A high cash-to-GDP ratio implies that more transactions are being carried out using physical currency.
The absence of cash hoarding and increased adoption of digital payments alternatives would have helped in reducing the cash component in the economy, but “current trends look to have belied those expectations”, Nomura said.

The latest data from RBI show that currency in circulation is now at Rs 19 lakh crore. In fact, the central bank has been pumping more money into the system over the last few weeks.

While the weekly growth of additional currency coming into circulation was at an average 0.6 per cent between January and March, April saw rapid growth, clearly to make up for the cash shortage and rising demand.

For instance, between April 20 and 27, currency in circulation grew by 4 per cent. A week before, it was over 3 per cent.