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Currency in circulation cannot be taken as indicator of heightened economic activity: SBI research
Feb-15-2019

The economic research wing of State Bank of India (SBI) has said that jump in currency in circulation (CIC) cannot be taken as a leading indicator of heightened economic activity, specifically the narrative of large cash usage in informal economy. It also claimed that the higher CIC is because of a change in demand for cash more than two years after re-monetization and added that money supply has been restored to full level now.

It estimated cash in Indian economy at Rs 20.4 lakh crore, stressing the rural economy continues to be depressed. It pointed out to data from leading indicators, including passenger car sales, commercial vehicle sales and two wheeler sales, among others, which shows a dip in activity, to point out that the higher CIC does not suggest a jump in economic activity. Elaborating on the same, it said there is a trend towards using currency notes of lower denomination as the re-monetisation is going through and also pointed out that the printing of Rs 2000 notes, introduced post demonetisation in November 2016, has been stopped by the RBI.

It  explained ‘this means to sustain a transaction of same amount now, more currency notes are required/volume of currency notes goes up and thus by default the value of CIC also goes up as more and more small notes are printed to at least ensure we are not reneging on economic activity’.  Besides, It said ‘we are in a state of 'paradox' at present, where the CIC has expanded but the income velocity of money has shown a sharp plunge.’

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