India faces yet another currency shortage but nobody seems to know what has caused this. Most explanations are in the realm of possibilities with little facts backing them.
While a host of reasons are being provided to explain the cash crunch, here are two factors that would have contributed very significantly to the shortage of currency.
First, banks say about a month back the RBI disallowed banks from transferring cash from one circle to another, a routine practice otherwise. As a result, banks were left with excess cash in some branches while other branches remained deficient in cash.
Second, and perhaps, the bigger reason was the 54 year low growth in bank deposits witnessed in financial year ending 2017-18. That left a gaping hole in the banking system that neither the government nor the RBI could anticipate.
Outstanding deposits in banks were at Rs 114.75 lakh crore on March 30, 2018, barely growing at 6.7 pc in the year-the lowest rate of growth in 5 decades-as against a very healthy 15.3 pc in 2016-17 and a 54 year average of 17.3 pc.
If the deposits had grown at the pace of the previous year, they could have given the banks an additional Rs 9.28 lakh crore and if they had grown at the 54 year average, potentially 11.44 lakh crore. That’s the kind of gap the banking system had to deal with as it entered the current financial year 2018-19 on April 1. It isn’t clear whether the deposits slowed down closer to the financial year closing thereby triggering the shortage.
Since the currency requirement of banks is the difference between what the customers deposit in their banks accounts and what they withdraw. Banks indent that amount of currency from RBI’s chests across the country. The lower the deposits, the higher the banks’ demand for currency from RBI.
Lower customer deposits mean banks need that much more currency to meet withdrawal needs. Besides, demand for currency spiked by Rs 45,000 cr in the past 2 weeks as against the normal requirement of Rs 20,000 crore.
However, even though the RBI claims it holds currency reserves of Rs 1.75 lakh crore, supply of currency from the banking regulator has been in short supply for 3-4 weeks now. Banks have been writing to the regulator bringing it to its notice that their ATMs are running dry.
There are several other reasons being attributed to the currency shortfall, none of which is being blamed in entirety: a sudden spike in cash demand for Baisakhi, Ugadi and Bihu festivals; wage payments at the end of the harvest season; high demand for cash in poll-bound Karnataka; hoarding of Rs 2000 notes; stoppage of issuance/printing of the Rs 2000 notes as well as the fact that the banks are still to re-calibrate 20-25 pc of ATMs to accept and dispense the new Rs 200 note.
Interestingly, of Rs 6.7 lakh crore worth of Rs 2000 notes in circulation (out of the total Rs 18.43 lakh crore of current in circulation), nearly 25 per cent have not returned to the banking system and hence are believed to have been hoarded.
But the other explanations regarding high demand is festival season is far from convincing since India celebrates bigger festivals round the year. Also, higher cash withdrawals in Karnataka should have have at best affected Karnataka and the neighbouring states, not the entire nation, including Delhi/NCR and Mumbai.
But with banks being provided in a week what they need on a daily basis, this crisis it seems will get worse briefly before it gets any better.