Money Supply: Currency in circulation declines

The money supply (M3) registered growth of 7.1% as on 09 December 2016. The growth was lower than 8.5% in the month of November 2016. Meanwhile, on annual basis the M3 growth was lower than in December 2015, amid fall in currency with public and deceleration in other deposits with RBI, while demand deposits with banks and time deposits with banks accelerated. In a historic move, the government, on advice of RBI, announced that existing notes of Rs 500 and Rs 1000 denomination ceased to be legal tender from 09 November 2016. A new series of Rs 500 and Rs 2000 notes were introduced by RBI from 10 November 2016. Accordingly, old notes that have been demonetised can be deposited in bank accounts (without limit till 31 December 2016) or can be exchanged for legal tender.

This move reduced the currency in circulation drastically and increased the deposits with banks.

 

Meanwhile, the M3 decreased by Rs 559.5 billion or 0.5% fortnightly, led by fall in currency with the public, while time deposits with banks, demand deposits with banks and other deposits with RBI increased.

Components

M3 recorded growth of 4.3% till 09 December in 2016-17 compared with the 7.2% rise in the same period a year ago. Meanwhile, on annual basis the M3 growth was lower than in December 2015, amid fall in currency with public and deceleration in other deposits with RBI, while demand deposits with banks and time deposits with banks accelerated.

The growth rate in time deposits with banks accelerated to 14.2% from 10.8% a year ago, demand deposits with banks, another major component of broad money, increased at 29.4% from 13% a year ago while currency with public fall 48% from 12.4% rise a year ago.

Meanwhile, the M3 decreased by Rs 559.5 billion or 0.5% fortnightly, led by fall in currency with the public, while time deposits with banks, demand deposits with banks and other deposits with RBI increased.

Demand deposit with banks increased 21% till 09 December 2016 compared with a rise of 3.8% in the corresponding period a year ago. The annual growth rate stood at 29.4% as on 09 December 2016 compared with a rise of 13% a year ago. On other hand, time deposits increased at 12.3% till 09 December in 2016-17 compared with 7.4% growth a year ago. The annual growth rate stood at 14.2% as on 09 December compared with a 10.8% increase a year ago.

One of the major components of M3, that is currency with the public, fell 48% annually as on 09 December 2016 compared with 12.4% increase a year ago. It recorded 51.1% fall till 09 December in 2016-17 compared with a 8.4% increase in the same period a year ago. Meanwhile, fortnightly the currency with the public fall 14.4% or by Rs 1309.6 billion.

Sources

The net bank credit to government declined by Rs 944.6 billion in the fortnight ended 09 December 2016 but increased 22% till 09 December in 2016-17. This is higher than the rise of 12.4% growth a year ago. The annual growth rate accelerated to 16.9% as on 09 December 2016 compared with 7.2% a year ago. The growth in net foreign exchange assets of the banking sector stood at 2.7% till 09 December 2016 in 2016-17 lower from 9.4% growth a year ago. Meanwhile, the annual growth rate also decelerated 5.7% as on 09 December 2016 compared with a rise of 19.9% a year ago.

Reserve money

The reserve money growth declined annually in December 2016 compared with an annual rise in December 2015. The annual growth rate declined 29.6% as on 23 December 2016 compared with the 14.3% growth a year ago. The fall in currency in circulation led to fall in reserve money growth, while Bankers' Deposits with RBI and other deposits with RBI decelerated. The fall in currency in circulation was 40% as on 23 December 2016 compared with a rise of 13% rise a year ago. The bankers' deposit with the RBI decelerated at 6.5% compared with a rise of 17.9% rise a year ago and the other deposits with RBI also decelerated annually to 6.4%.

The net foreign exchange assets of the banking sector decelerated to 5.4% as on 23 December 2016 compared with a rise of 15.4% a year ago. Meanwhile, the growth rate was 2.5% till 23 December in 2016-17 compared with 9% rise in the same period a year ago. Net non-monetary liabilities of the RBI decreased 0.8% till 23 December 2016 in FY17 compared with a rise of 14.7% in the same period a year ago. The annual growth rate accelerated by 5.2% as on 23 December compared with rise of 4.5% a year ago.

Outlook

The growth of money supply in the economy slipped to 7% from 12% in the near term, and may slip further if 25-30% of unaccounted currency does not flow back into the banking system post demonetisation move. The demonetization led to massive influx of currency into the banking system with system liquidity turning into huge surplus as currency in circulation fell and deposit base grew by same amount. In a short period, the banking system will have to carry out a massive exercise of accepting old, demonetized notes and issuing new legal tender. This will be later followed by a massive outflow of currency back into the system.

Powered by Capital Market - Live News