The total currency in circulation (CIC) has declined in the first half of the current financial year — for the first time in at least 10 years.
Currency in circulation as on 31 March 2023 was Rs 33.78 lakh crore, which fell to Rs 33.01 lakh crore as on 22 September — a difference of about Rs 76,658 crore.
In the first half of the last two financial years, CIC went up by Rs 33,357 crore in FY23 and Rs 84,978 crore in FY22. In FY21, the Covid year, CIC was up Rs 2.43 lakh crore during the April-September period.
This is mainly because of the withdrawal of the Rs 2,000 banknote that was announced on 19 May. According to the latest data released by the Reserve Bank of India, Rs 3.46 lakh crore of Rs 2,000 note has been returned, which is 96 per cent of the Rs 3.56 lakh crore of the Rs 2,000 note that was in circulation until 19 May.
This means that while the Reserve Bank of India has pumped in Rs 2.69 lakh crore during April-September, CIC fell as the currency that was pumped in was lower than what went out in the form of Rs 2000 note.
Of the Rs 2,000 banknote that was returned, only 13 per cent was exchanged and remained deposited in bank accounts. Those notes then go to the Reserve Bank of India’s vault, as they go out of circulation.
“One reason for the fall in currency in circulation is the withdrawal of the Rs 2,000 banknote. At the same time, someone who has deposited the Rs 2,000 note in a bank has withdrawn a much lesser amount,” a source in the central bank said.
“This is because one does not depend on cash for transactions like before. The rise in digital transactions ensured that despite the withdrawal of the Rs 2,000 note, there was not any significant impact on the economy,” the person added.
“Based on past Reserve Bank of India updates, usually 87 per cent of the Rs 2,000 notes are deposited, and the rest is exchanged. It’s the deposited portion which is the effective reduction in currency in circulation, or INR 3.0 lakh crore. The actual reduction in currency in circulation is much lower, which indicates that individuals are withdrawing cash after depositing the Rs 2,000 notes; hence, on a net basis, the reduction in currency in circulation is much lower,” said Gaura Sengupta, economist with IDFC First Bank.
“One of the possible implications is that currency leakage (increase in currency in circulation) in H2FY24 could be higher as a proportion of the Rs 2,000 notes deposited are withdrawn,” she said.
Due to the rise in digital transactions, the growth of currency in circulation has fallen in recent years. In fact, CIC growth was in single digits in FY23 and FY22, in contrast with the previous years.
“Another factor which is limiting currency leakage (increase in currency in circulation) post Covid-19 is the increasing prominence of electronic payments consisting of UPI, IMPS, and prepaid instruments. Indeed, in H1FY24, electronic payment transactions (UPI, IMPS, and prepaid instruments) are nearly six times what they used to be in H1FY20 (pre-Covid-19). This is mainly due to the increasing utilisation of UPI,” Sengupta added.