India’s surging currency hoard amid covid-19 may take a while to ease off2 min read . Updated: 19 Nov 2020, 10:12 PM IST
The urge to hoard cash for a looming medical emergency amid pandemic is laced with fear of a shortage of cash
Ever since the covid-19 pandemic struck, Indians have been stashing cash, driven by the basic tendency to save the most liquid asset during a crisis.
Cash withdrawals from bank branches and automated teller machines (ATM) have increased sharply so far in FY21. Currency in circulation has grown at a rate of 21%, a decadal high and shows no signs of abating, data from the Reserve Bank of India (RBI) shows. But the level of cash in the economy grows along with the economy.
The cash to gross domestic product (GDP) ratio is a more accurate gauge of whether there is hoarding or general increase. This ratio came back to the historic trend of 12% in FY20, after the drop due to demonetization. But the recent growth in currency holdings could mean that this ratio could surge to 14-15% of GDP in FY21.
Part of this would be simply because nominal GDP would shrink this year due to a recession. But a lot of it is also because cash is rising despite RBI, the government and even banks pushing digital payment methods.
What started off as an emergency liquidity build-up got another boost as households withdrew cash ahead of the festive season. As such, the perception of risk hasn’t abated given the pandemic is yet to be contained. But the urge to hoard cash for a looming medical emergency amid a pandemic is laced with fear of a shortage of cash.
“Every crisis, especially after demonetization, is unfortunately clubbed with a potential cash shortage fear," said Abheek Barua, chief economist at HDFC Bank Ltd. “This is another factor besides wanting to have liquidity during a crisis for the currency levels to surge."
Plus, there is an underlying unease because three banks have gone under within a year. Sure, two of them have been rescued but at one point, depositors of Yes Bank Ltd, Punjab and Maharashtra Co-operative Bank Ltd and now Lakshmi Vilas Bank Ltd couldn’t withdraw beyond a certain limit as these lenders were put under moratorium. That said, the trust in banking system remains, as seen by the growth in bank deposits vis-à-vis other financial instruments.
Several factors that are conducive to cash usage are at play now, which make economists conclude that cash levels are unlikely to ease any time soon.
Much of the growth this year in output would be from the rural economy. The prospects of good agricultural growth mean that India’s villages and small towns may contribute to demand more than large urban centres.
Rural transactions tend to be cash-intensive since digital penetration is low. Ergo, cash holdings may keep rising fast as it becomes a default in transactions.
Another factor is the recovery in the real estate sector. The early signs of recovery in real estate sales portends a rise in cash usage as such transactions may contain a cash component. Barua expects this trend to reverse only by the middle of 2021. Until then, India’s cash levels may continue to stay high.