According to data released by the Reserve Bank of India (RBI), currency in circulation grew by Rs 5,01,405 crore between January 1, 2019, and January 1, 2020. Overall, it has gone up to Rs 27,70,315 crore, up 22% from the previous year. This is the sharpest increase to date, if the post-demonetisation surge due to banknote replacement is excluded.
While currency in circulation shrunk nearly 20% in FY17 due to demonetisation, it jumped 37% the following year when fresh notes were issued. The average growth for the last decade was 12.6% and for the last 50 years 13.8%.
According to a paper published by the RBI, in the last 50 years there were only four occasions when currency growth was higher than 17% for three-four consecutive years. On three occasions, ie, during 1987-90, 1993-96 and 2005-09, higher currency demand was caused by relatively high nominal GDP growth. The recent surge is despite GDP shrinking.
In 2020, it was uncertainty brought about by the pandemic that drove people to hoard more cash over fears of medical or financial emergency. While currency in circulation does rise with the increase in GDP, a recent paper published by RBI staff said the high growth in currency during the last three years was despite low nominal GDP growth.
As Covid-19 cases in India rose last year, deposit growth slowed and year-on-year growth in currency with the public accelerated from 11.3% as on February 28, 2020, to 14.5% by end-March 2020 and to 21% in June 2020.
News reports this week said that 35% of all US dollars in circulation were printed in the last 10 months — money created as an outcome of central bank easing.
According to the RBI, this is a global phenomenon. In its August annual report, the RBI pointed out that the increase in currency in circulation was particularly sharp in Brazil, Chile, India, Russia and Turkey, as well as in advanced economies such as the US, Spain, Italy, Germany and France, where the use of cash is less.
“The rise in currency in circulation in these countries occurred concomitantly with liquidity injecting measures undertaken by their central banks. They were also impacted by the Covid-19 build-up of precautionary balance,” the RBI had said.