Currency in circulation

Currency in circulation

Subject: Economy

Section: Monetary Policy

Context: During the financial year so far, currency with the public has gone up by 9.7 per cent, or Rs 2.66 lakh crore, from Rs 27.51 lakh crore in March 2021.

Cash with the public has shot up 285 per cent from a low of Rs 7.82 lakh crore, recorded on December 23, 2016.

Since demonetisation in 2016, currency in circulation has risen steadily every year, with the CiC to GDP ratio having surged to 14.5 per cent in 2020-21 from 8.7 per cent in 2016-17.

Cause?

Even as the government is pushing for a “less-cash society” and with digital transactions clocking steady growth, cash remains the preferred mode of payment:

• The jump in cash with the public was primarily driven by a rush for cash by the public in 2020-21 as the government announced a stringent lockdown to tackle the spread of the Covid pandemic.
• Absolute rise in currency in circulation to the GDP ratio- higher than pre demonetisation level
• During festival seasons and elections, cash demand remains high.
• A large number of merchants still depend on cash payments for end-to-end transactions.
• Moreover, 90 percent of e-commerce transactions use cash as a mode of payment in tier four cities compared to 50 per cent in tier one cities.
•  government bond auctions and fiscal packages that are intended to boost economic recovery
• The decline in bank deposits is also a pandemic-induced syndrome- Due to increased uncertainty and supply side shock, investors and consumers feel safe in keeping cash with them.

Impact? 

• If there is too much money in circulation, both in terms of cash and credit, then the value of legal tender decreases. This leads to “too much money chasing too few goods”, causing demand-pull inflation. 
• Currency depreciation

Currency in Circulation (CiC)

RBI’s definition, currency with public is arrived at after deducting cash with banks from total currency in circulation (CiC).

Currency in Circulation (CiC) refers to currency notes and coins issued by the central bank within a country that is physically used to conduct transactions between consumers and businesses. Thus, Currency in circulation comprises of:

• currency notes and coins with the public
• cash in hand with banks.

Monetary aggregates

In the money supply statistics, central bank money is M0 while the commercial bank money is divided up into the M1 and M3 components. M2 and M4 components also include Post-Office deposits as well.

• Reserve Money (M0):-Reserve money is also called central bank money, monetary base, base money, or high-powered money. In the most simple language, Reserve Money is Currency in Circulation plus Deposits of Commercial Banks with RBI.

Mo = Currency in circulation + Bankers’ deposits with the RBI + ‘Other’ deposits with the RBI

• M1 (Narrow Money) =Currency with the public + Deposit money of the public (Demand deposits with the banking system + ‘Other’ deposits with the RBI).
• M2=M1 + Savings deposits with Post office savings banks.
• M3 (Broad Money) = M1+ Time deposits with the banking system