Four weeks have passed since the announcement by Prime Minister Narendra Modi on the November 8, 2016 to demonetise currencies of denomination Rs 500 and Rs 1000. Till now, most of the ATMs across the country are in non-functioning mode. There are serpentine queues in front of banks and the few functioning ATMs. These are the daily scenes in metro cities of India at present time, leave alone small towns and villages, many of those probably have gone back to the era of barter system. This short note attempts to understand the actual liquidity scenario post-demonetisation period from weekly data on money supply.

 

By definition, the Currency with public is the sum of

(i) Notes in circulation,

(ii) Circulation of rupee coins,

(iii) Circulation of small coins, and net of (iv) Cash on hand with banks.

 

The latter is defined as coins, currencies and other unrestricted liquid funds held at banks. Apart from Currency with public, Demand  deposit  with  banks  constitutes the major part of deposit  money  of public. Table 1 shows the decomposition of the stock of Currency with public, and Demand deposit of public with banks for the latest three dates available.

 

 

Table 1: Components of money supply (INR Million)

 

Week ended(2016)	Notes in circulation	Circulation of rupee coins	Currency  with public Circulation of  small coins	Cash on hand with banks	Total	Demand deposit of public with banks
Oct 28	1,75,40,220	2,25,300	7,430	7,59,140	1,70,13,810	1,05,11,780
Nov 11	1,76,44,510	2,25,300	7,430	26,14,950	1,52,62,300	1,07,71,690
Nov 25	1,76,44,510	2,25,300	7,430	26,14,950	91,19,100	1,19,51,400

Source:  CMIE  Economic Outlook

 

 

Comparing the various components of money supply between 28th October, 2016 and 11th November, 2016, it  is obvious that post demonetisation, there has been a sharp increase in Cash on hand with banks by Rs. 1855810 million. The stock of Cash on hand with banks on 11th November,  2016 is more than 3 times higher than its value in the pre-demonetisation date (28th October, 2016). On the other hand, Notes in circulation have increased only by INR 1,04,290 million, causing total currency in circulation to fall by INR 17,51,510 million. Post demonetisation, there has been no change in circulation of rupee coins and small coins. Again, the Demand deposit of public with bank has increased by INR 2,59,910 million post demonetisation. Hence, as on 11th November, 2016, the total increase in Cash on hand with banks and Demand deposit of public with banks is INR 21,15,720 million.

The weekly data indicates that immediately after the announcement, 14.6% of the demonetised currency of INR 14,50,000 crore has come back to the banking system, while only 0.72% of it is channelised to the hands of public. The crucial point to note here is that, what have come back to the banking system are in old currencies of INR 500 and INR 1000 and can not be re-channelised to the public. The money channelised to the public are in new INR 2000 notes, and old currencies of lower denomination (as on 11th November, 2016, new 500 rupee notes have not been available).

 

The latest data for money supply are available for 25th November, 2016. The data on money supply for this date only provide information on the total currency in circulation, not its components. Hence, we do not know how much cash is channelised to public, and how much is Cash on hand with banks as on 25th November, 2016. However, the total currency with public shows a sharp drop to INR 91,19,100, indicating substantial addition to Cash on hand with banks. A further rise of deposits to INR 1,19,51,400 is also seen. The huge mismatch between inflow of money to banking system and its channelisation to public clearly indicates rationing of supply of cash by RBI, or in other words, lack of speed in re-monetisation of the economy.

 

 

The author is Assistant Professor, NIPFP. Click here for detailed profile.

 

The views expressed in the post are those of the author only. No responsibility for them should be attributed to NIPFP.