Currency in circulation slows down since May on spike in fuel prices

The currency in circulation (CiC), which increased exponentially after the note ban in November 2016 under which as many as 99.9 per cent of them returned to the system, has seen some slowdown in expansion since May this year likely due to higher fuel prices and Reserve Bank's intervention in forex market, says a report.

Currency in circulation increased from Rs 9 trillion in January 2017 to Rs 19.5 trillion as of September 14 this year. But since the beginning of May 2018, the same has been in the range of Rs 19-19.6 trillion, says the report.

"One possible reason can be people may be cutting back discretionary spending with the recent spurt in fuel prices, mostly in rural areas," says SBI Research in a report Monday.

The other factor could be to the extent RBI selling dollars directly from its foreign exchange reserves to designated dealers/banks thereby withdrawing rupee resources in return, thus reducing currency in circulation, it said.

The report, however, said such intervention, since taking place between banks, should not have major impact on systemic liquidity.

The third reason, though insignificant, could also be RBI replacing soiled notes, it added.

The decline in CiC is a seasonal phenomenon but this time it seems the decline is more than just seasonal and has continued beyond August, it noted.
 

The Reserve Bank's weekly data for the last 10 years shows a pattern in CiC decline in the last fortnight of every July, which is partly explained by the low cash demand from the agriculture sector.

The demand for currency increases after the 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, the report added.