Unusual spurt in currency demand in states like Uttar Pradesh, Madhya Pradesh, Andhra Pradesh as well as poll-bound Karnataka led to dry ATMs in several parts of the country, sending the government scrambling to make contingency plans to cover the deficit.
The government said it suspects that Rs 2,000 notes were being hoarded and plans to increase 5-fold the printing of Rs 500 notes.
Within a month, it said, Rs 70,000-75,000 crore will be printed.
The Reserve Bank said the printing of currency has been ramped up in all the four note presses, and the shortage in some pockets is due to logistical issues.
ATMs of both public and private sector lenders in several cities were either not operating or showed no cash signs, a situation that officials insisted was not alarming and did not warrant panic.
Some ATMs downed shutters with 'No cash' and 'Out of service' signs, prompting the government to move currency from surplus regions. Some ATMs in national capital Delhi too went dry.
While Finance Minister Arun Jaitley assured hassled customers that the government will fix the problem quickly, officials attributed the cash crunch to crop procurement and hoarding of high denomination currency ahead of elections in Karnataka.
Such crisis was however not witnessed in any of the previous procurement seasons.
"Overall there is more than adequate currency in circulation and also available with the Banks. The temporary shortage caused by 'sudden and unusual increase' (in demand) in some areas is being tackled quickly," Jaitley, who has been away from office since April 2 due to a kidney ailment, said in a tweet.
Jaitley said he has reviewed the currency situation in the country.
A statement by the finance ministry confirmed reports of cash shortages and some ATMs running dry or becoming non-functional in some parts of the country.
"There has been unusual spurt in currency demand in the country in last three months," it said.
While currency supply increased by Rs 45,000 crore in the first 13 days of April, "unusual spurt in demand" was seen more in some parts of Andhra Pradesh, Telangana, Karnataka, Madhya Pradesh and Bihar, it said.
"So, in a month, we will be printing about Rs 70,000-Rs 75,000 crore. This should give you assurance that we are geared up to meet the rising demand," he said.
The government, he said, suspects that Rs 2,000 notes are being hoarded as they are not coming back into the circulation fast enough.
"There is also a perception that there may be shortage of currency in the future. So people have started withdrawing and it has contributed to the crisis," he said. "We keep adequate stock of currency notes, which is one-sixth of the currency in circulation."
Currently, the currency in stock is about Rs 2 lakh crore and the reserves are adequate to meet any unusual spurt in demand, he said.
He assured that there was no reason for anyone to fear or any apprehension that either private sector or public sector banks are in danger. "Our banking is totally safe and people should not have in any apprehension in keeping deposits," he said.
Minister of State for Finance Shiv Pratap Shukla said the government has formed a committee to address the problem of currency shortage in certain states and the issue would be resolved in next 2-3 days.
The currency problem originated in the southern states and may have been fuelled by rumours that money in banks is not safe due to a certain provision in the proposed Financial Resolution and Deposit Insurance (FRDI) Bill, 2017.
RBI report shows that the currency in circulation in the country has reached the pre-demonetisation level of about Rs 17 lakh crore.
"The Government of India with the Reserve Bank of India have taken all steps to meet this unusual demand. We had adequate reserves of currency notes which have been used to meet fully the extraordinary demand generated so far," the finance ministry statement said.
"We continue to have in stock adequate currency notes of all denominations, including of Rs 500, Rs 200 and Rs 100 to meet any demand," it added.
The government said there has been adequate supply of currency notes to meet entire demand. "The government would also like to assure that it would be supplying adequate currency notes to meet even higher levels of demand if such demand were to continue in the coming days/months."
Also, steps are being taken to ensure that ATMs are supplied with cash and non-functional ATMs normalised at the earliest.
SBI Chairman Rajnish Kumar said it would not be correct to state that there is a currency shortage in the country. There has been an "imbalance" due to the crop procurement season, when demand for currency goes up.
(This story has not been edited by Business Standard staff and is auto-generated from a syndicated feed.)