One and a half years after demonetisation, Indians are hoarding cash again

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If the latest figures from the Reserve Bank of India (RBI) are anything to go by, it seems that India is back to its hoarding ways as the amount of cash held by the public is at a record high.

After the short-term disruption caused by the government’s demonetisation initiative in late 2016 caused the amount of currency held by the Indian public to plummet to ₹7.8 trillion, data from the RBI shows this figure reached ₹18.5 trillion in the last week of May 2018 - a 31% year-on-year increase. This is even higher than the ₹17 trillion worth of money in public hands prior to demonetisation.

From November 2016 to June 2017, Indians returned around ₹15.3 trillion worth of scrapped ₹500 and ₹1000 notes to banks. To supplement the shortfall in cash after demonetisation, the government has introduced a ₹2000 note and ₹200 note, as well as an updated version of the ₹500 note.
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As a result, the amount of cash held by Indians gradually increased over the course of 2017, crossing the ₹10 trillion mark in February and the ₹15 trillion mark in September.

Fears of a cash crunch

A likely explanation for the hoarding lies with the low level of public confidence in India’s banks as well as tax avoidance and the growth of alternative savings instruments like mutual funds.

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Earlier this year, a number of ATMs around the country started reporting shortages of cash, sparking fears that banks were facing a liquidity problem. In addition, the bad loan mess at India’s public-sector banks coupled with concerns that Indians could see the value of their deposits decline in the event that these banks undergo resolution has probably caused people to steer clear of them.

The amount of cash held by the public at any given time is calculated by subtracting the total amount of cash held by banks from the total amount of cash in circulation. Concurrently, the total currency in circulation at the beginning of June 2018 was ₹19.3 trillion, more than double the ₹8.9 trillion that was circulating in the economy in early January 2017.
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