Declining Income Velocity Of Money Indicates Staggered Pickup In Economic Activity

A latest research report from the State Bank Of India (SBI) indicates that domestic currency in circulation (CIC) at Rs 20.4 trillion is still short of trend CIC by at least Rs 1.5 lakh crore. Thus, any argument of cash coming back aggressively into the system and financing informal activities is not entirely correct, noted the report. Even though CIC has expanded, income velocity of money has shown a sharp plunge. In principle, the declining velocity indicates that money is not getting adequately circulated in the economy.

SBI internal estimates suggest that in the more advanced and larger States like Maharashtra, UP, Karnataka etc, the income velocity is far less than the national average. In other States like Chhattisgarh, MP, AP and J & K, the velocity is much higher than the national average. A lower income velocity of money in larger and developed states indicates economic activity is indeed slowing down.

A declining income velocity of money thus suggests that a pickup in economic activity remains elusive. Rural economy still remains depressed,with latest inflation numbers (specifically the crash in WPI and CPI as usual) suggesting any meaningful pickup in food and even manufacturing inflation is still at a distance. Bank credit has now declined for 3 consecutive fortnights, noted the report.

Powered by Capital Market - Live News