Indians Continue To Hold More Cash Even As Economy Reopens

Currency in circulation growth remains elevated. Precautionary holdings along with lower velocity of cash may be responsible. 

A bus conductor displays Indian bank rupee notes for a photograph in Coonoor, Tamil Nadu, India, on Thursday, June 7, 2018.  Photographer: Dhiraj Singh/Bloomberg
A bus conductor displays Indian bank rupee notes for a photograph in Coonoor, Tamil Nadu, India, on Thursday, June 7, 2018. Photographer: Dhiraj Singh/Bloomberg

As the Covid-19 pandemic hit Indian shores in March, Indians, stuck at home, unable to spend and transact, held on to more cash as a precaution. This was the case not just in India but across a number of countries where precautionary savings rose.

In India, growth in currency in circulation, which was at about 12% until mid-March, accelerated quickly. It has continued rising even as the economy reopened and physical and business activity started to normalise. At last read, currency in circulation was growing at over 23% year-on-year, defying any correlation with weaker growth in the economy and fewer transactions.

“Initially, people were hoarding cash because of uncertainty and concerns over accessibility to banking services, causing a spike in CIC growth," said Soumyajit Niyogi, associate director at India Ratings and Research. “With savings account interest rates at historic lows, they also have no incentive to deposit cash holdings into bank accounts.”

What’s Happening On The Ground?

While data suggests that Indians are holding on to more cash, anecdotal evidence points to slightly conflicting trends.

For one, higher growth in currency in circulation has not been in sync with ATM withdrawals, which have fallen.

“In April, when currency in circulation had begun to show a spike, ATM withdrawals had collapsed by as much as 50-60%, compared to pre-pandemic levels. This holds for both the quantum of cash withdrawn and the frequency of ATM visits. Even in August, cash withdrawals remained lower by about 25% below pre-pandemic levels,” said Rustom Irani, managing director and chief executive officer at Hitachi Payment Services, which manages ATMs across most large banks.

One early reason for the rise in currency in circulation was cash transfers announced by the government for Jan Dhan account holders. However, the rise has persisted even after the transfers ended.

Anush Raghavan, senior vice president at cash management company CMS Info Systems and president of Cash Logistics Association, offered a few possible explanations for the continued rise in currency in circulation. First, he believes the RBI stepped up currency printing as the country went into lockdown to avoid the risk of any shortage.

“To smoothen out the impact from any probable supply disruptions that may have otherwise created a cash crunch and disrupted timely transfer of government subsidies, the central bank may have been prompted to print more currency,” Raghavan said.

Also the velocity of currency moving in and out of bank currency chests would have been hampered in the early months, which could have prompted the central bank to augment currency supply. “The lockdowns, loan moratorium, and drop in retail spends, did impact supply chains and the efficiency of currency finding its way back to banking channels. Together with the printing of more money, this created a lag effect between the cash pumped in and the cash withdrawn,” Raghavan said.

The situation differed from state to state. As such, the demand for fresh currency would have differed across regions.

States with a high number of Covid-19 cases and stricter lockdown regimes, such as Delhi, Maharashtra and West Bengal, saw cash circulation fall to between 70-75% of normal levels, Raghavan explained, based on the company’s own data. In contrast, states such as Tamil Nadu, Karnataka and Rajasthan, witnessed almost-normal cash circulation of 88-100%, found CMS, which is India’s largest cash management agency.

Soumya Kanti Ghosh, chief economist at State Bank of India, agreed that the build up in currency in circulation may be a combination of higher fresh printing and consumers holding on to cash for longer.

“The growth in CIC and the currency in public maybe reflective of longer holding periods. If a customer was earlier holding money for a certain amount of time, say a week, and then withdrawing more money, he is not doing that anymore. Instead he is holding on to that amount for longer, creating a cumulative effect,” Ghosh said.

A Return To Normal?

While year-on-year growth in currency remains high, Niyogi of India Ratings said there are some signs of normalcy. Growth in CIC is likely to trend downwards in the second half of the financial year, as already evident in weekly and monthly trends, Niyogi said.

The month-on-month growth rate in currency has slowed from a rapid 3% in the months of April and May to just under 1% in July and August. Also, slower growth will eventually have a bearing on growth in currency in circulation. “The unusual times have led to a breakdown of the relation between growth in CIC compared to nominal GDP. However, considering that GDP is expected to contract even in the next three quarters, households will be forced to utilise cash holdings for sustenance,” Niyogi said.

Raghavan of CMS also noted that cash usage had started to normalise, which may bring back velocity of currency in circulation and reduce the imperative for fresh printing of currency.

“Now, cash withdrawals from ATMs in the country have doubled from 46% (of pre-covid levels) in April to about 90% in August in value terms, according to the CMS Cash Index. This is led by semi-urban and rural India, where withdrawals are at 103% of the pre-pandemic levels, followed by semi-metro cities at 90%. In the metros, withdrawals are at about 60%,” said Raghavan.

Overall, value of ATM withdrawals is close to 90% across the country, he said.