Currency holdings account for one-fifth of money supply growth in past 12 months
The rise in currency holdings is a retrograde trend and the government should take steps to address the issue, perhaps by withdrawing Rs1,000 denomination notes from circulation
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In the year to 2 September, Reserve Bank of India (RBI) data shows that M3, a measure of money supply, grew by Rs11.8 trillion from a year ago.
Over the same period, the growth in currency holdings with the public was Rs2.37 trillion.
In other words, as much as a fifth of the increase in money supply over the past one year was on account of increased currency with the public.
This isn’t normal, as the chart shows.
In fact, the proportion of currency in the growth of money supply has been between 11% and 13% most years in the past decade.
The notable exception was in 2010, when it accounted for 18% of the growth in M3.
Economists have cited various reasons for the growth in currency holdings, ranging from elections to higher rural wages to keeping black money in banknotes rather than in gold or real estate.
Whatever be the reason, it’s clear that the rise in currency holdings is a retrograde trend and the government should take steps to address the issue, perhaps by withdrawing Rs1,000 denomination notes from circulation.