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Statsguru: Will RBI scale back open market operations in FY20?

The surge in CIC is due to the recovery of the informal sector, which had suffered after demonetisation

Ishan Bakshi  |  New Delhi 

Illustration: Ajay Mohanty

In 2018-19, the (RBI) stepped up its (OMOs). In order to get a sense whether the trend will persist in FY20, a new report from examines two main drivers of the in India — currency in circulation (CIC) and the RBI's forex interventions.

India's CIC to gross domestic product (GDP) ratio, which fell sharply after demonetisation, had stabilised by mid 2017. However, as seen in chart 1, CIC began to surge towards the end of 2017.

Typically, CIC is positively correlated with rural demand (chart 2). But, the report suggests this relationship may have broken as CIC has surged even when more than two-thirds of rural India is struggling.

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Instead, the surge in CIC is due to the recovery of the informal sector, which had suffered after But, as compliance under the goods and services tax improves, “the rise in informality and, thereby, the acceleration in CIC could be contained”, which suggests a modest increase but not an acceleration in However, a report from State Bank of India's economic research department says while "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 "

Then there's also the balance of payments (BoP) issue. A large deficit in FY19 (chart 5) coupled with the pressure on the rupee had led to large interventions by the in the forex market. This, as the report points out, "sucked out domestic liquidity which had to be replenished by OMO purchases". But the fall in oil prices to $65 from $80 per barrel will narrow the BOP deficit in the coming financial year, suggesting that the “RBI’s FX interventions may not be as strong as in FY19 (chart 6)”.

StatsGuru is a weekly feature. Every Monday, Business Standard guides you through the numbers you need to know to make sense of the headlines | Compiled by BS Research Bureau

First Published: Sun, February 17 2019. 23:35 IST