CiC to GDP ratio remains high at 14.5% for FY21: Currency-in-circulation growth falls

The growth in CiC has fallen to 7.9 per cent (Rs 2.14 lakh crore) in November 2021 as against 22.2 per cent (over Rs 5 lakh crore) growth in the same month a year ago.

A year after the Covid-19 pandemic led to a surge in demand for cash, the growth in currency in circulation (CiC) has declined as of November this year if the latest data from the Reserve Bank of India and the Finance Ministry is any indication.

The growth in CiC has fallen to 7.9 per cent (Rs 2.14 lakh crore) in November 2021 as against 22.2 per cent (over Rs 5 lakh crore) growth in the same month a year ago. However, more than five years after demonetisation, CiC has risen steadily every year, with the CiC to GDP ratio having now surged to 14.5 per cent in 2020-21 from 8.7 per cent in 2016-17, as per data presented by the Finance Ministry in Parliament. CiC to GDP ratio is now ever higher than that in the pre-demonetisation period.

Precautionary demand for currency during the pandemic times has been a key reason for rising currency with public, according to the Finance Ministry.

Cash in the system has been steadily rising, even though the government and the RBI have pushed for a “less cash society”, digitisation of payments and imposed restrictions on the use of cash in various transactions. CiC rose to Rs 29.56 lakh crore as December 3, 2021 from Rs 27.58 lakh crore a year ago. The government had argued that demonetisation would lead to lesser cash with public, however, cash usage has only risen since then.

Demand for currency depends upon several macro-economic factors including economic growth and level of interest rate. Precautionary demand generated by public during financial year 2020-21 due to Covid-19 pandemic induced uncertainties is also an important factor in currency demand,” Minister of State for Finance Pankaj Chaudhary said in reply to a query on Rajya Sabha on Tuesday, “Combination of greater public demand for cash and a contraction in GDP has led to an increase in CiC as a percentage of GDP to 12 per cent and 14.5 per cent in FY 2019-20 and FY 2020-21, respectively,” he added.

However, year on year growth in CiC has decelerated sharply to 7.9 per cent as on November 2021 from pandemic influenced surge to 22.2 per cent a year ago, he said.

As per the RBI’s definition, currency with public is arrived at after deducting cash with banks from total CiC. CIC refers to cash or currency within a country that is physically used to conduct transactions between consumers and businesses. After Rs 500 and Rs 1,000 notes were withdrawn in November 2016, currency with the public — which stood at Rs 17.97 lakh crore on November 4, 2016 — declined to Rs 7.8 lakh crore in January 2017.

The jump in currency with public last year was primarily driven by a rush for cash by the public, as the Centre announced stringent lockdown to tackle the spread of the Covid pandemic. The sudden withdrawal of notes in November 2016 had roiled the economy, with demand falling, businesses facing a crisis and gross domestic product growth declining nearly 1.5 per cent. Many small units were hit hard and shut shutters after the note ban. It also created a liquidity shortage.
Although digital payments have been growing, both in value and volume terms across countries, data suggests that during the same time CiC to GDP ratio has increased in consonance with the overall economic growth, as per an RBI study on digital payments.