Cash in circulation in India has reached a record ₹42.3 lakh crore, marking a 12% increase in the first 15 days of April. According to reports from The Economic Times, this surge represents an increase of over ₹61,000 crore during this period, with the growth rate of 11.8% year-on-year being the highest since early 2017 following demonetisation. The sustained pattern of rising cash demand has been observed over the past six months and throughout the last financial year, as central bank data reveals.
The cash circulation spike is attributed to multiple economic factors, as reported by The Hindu BusinessLine. Abhishek Upadhyay, co-head of research at ICICI Securities Primary Dealership, noted that currency demand had been 'somewhat subdued' relative to GDP growth in recent years, setting the stage for a sharper rebound. Soumya Kanti Ghosh, group chief economic adviser at State Bank of India, highlighted that lower interest rates have supported cash usage, particularly in rural areas with higher propensity to spend. Additionally, a cut in goods and services tax on several daily-use items in September boosted demand, while higher prices of precious metals may have lifted currency circulation through recycling of gold and silver from households.
The sustained rise in cash circulation could pose challenges for surplus liquidity in the banking system, according to economists cited by The Hindu BusinessLine. HDFC Bank expects the liquidity surplus to average around 1% of deposits in the first half of the current financial year, before easing to 0.5% in the second half. However, economist Sakshi Gupta warned that if cash in circulation continues to remain elevated due to rising inflation, acceleration in rural demand, and impacts from state elections, liquidity balances could move towards the lower band of the forecast range. The RBI stated in March that maintaining surplus liquidity within a range of 0.6%-1.1% of deposits helps keep the spread between weighted average call rate and policy rate narrow.
Looking ahead, the liquidity landscape may face additional pressures, as reported by The Hindu BusinessLine. Dhiraj Nim, an economist and FX strategist at ANZ, noted that while RBI dividend will support banking liquidity, cash in circulation will drain it further. The continuous cash demand surge may impact the liquidity framework of the banking system, as experts warn about the transformative phase this represents for India's currency circulation.
