Yet another metric that shows the improved outlook in the economy is the growth in demand deposits with banks. Year-on-year (y-o-y) growth in demand deposits had briefly turned negative in January this year, although the growth in term deposits continued to be around 23%.
The chart shows that the y-o-y growth in demand deposits has been going up in the last couple of months, while the growth rate of term deposits has remained more or less the same. If sustained, this is another indication of an increase in transactions demand.
But growth in transactions demand is also shown by the “currency with the public” component of money supply. Unfortunately, growth in this metric has been falling steadily, going down from a y-o-y rate of 17.4% in the middle of March to 15.3% on 22 May. Compare that with the growth in this component from a 16.2% y-o-y rate in the middle of March 2008 to a y-o-y rate of 19.6% by the end of May.
Usually, “currency with the public” grows faster during prosperous times, because people keep more cash on hand as they spend more.
Is the lower growth in currency with the public this year a reflection of the downturn in the economy? Perhaps not. That’s because prices of goods too are not going up as fast as they did last year.
More money in hand: Year-on-year growth rate in %. Ahmed Raza Khan / Mint
For example, while the y-o-y rise in the Wholesale Price Index, or WPI, was 0.5% on 23 May, it was as high as 8.9% at the end of May last year. Naturally, if prices are not going up so rapidly, the amount of money in people’s pockets also need not go up by much.
As a matter of fact, if we take the “real” growth in currency with the public, or the growth in this variable after adjusting for inflation (WPI), we find that the real growth in currency with the public is much higher now than in the same period of May 2008.
To illustrate, on 23 May the real growth in currency with the public was 15.3 (the y-o-y growth in the metric) minus 0.5%, or the rate of inflation, which is 14.8%.
In contrast, while the real growth in currency with the public was 19.6% at the end of May 2008, the WPI inflation rate was 8.9%, which means the real rate of growth of currency with the public was 10.7%.
Of course, there hasn’t been much of a difference in the rate of inflation between mid-March and end-May this year, so you could argue that the real rate of growth of currency with the public has indeed been decelerating in the past two months.
At the same time, though, the elections came to an end during the period and it’s very likely that elections increased the demand for cash in hand.
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