What caused the cash crunch last week

The RBI fell short of pumping Rs 150 billion into the economy at the beginning of 2018-2019.
Abhishek Waghmare reports.

Currency in circulation increased by Rs 439 billion to Rs 18,732 billion during March 31 to April 13, according to the weekly data on reserve money published by the Reserve Bank of India.

This period is the closest to the first fortnight of financial year 2018-2019.

The RBI had provided currency worth Rs 544 billion to the economy in the same period in 2017-2018 and Rs 539 billion in 2016-2017.

In the past few days, analysts and experts have pointed out that the Indian economy needs more cash in circulation as it grows, commensurate with growth in gross domestic product (in nominal terms).

According to a Business Standard analysis, if one takes into account the nominal GDP growth of 10 per cent for 2017-2o18, then the RBI potentially fell short of pumping Rs 150 billion into the economy at the beginning of 2018-2019.

The need for cash in the first fortnight turns out to be 10 per cent over and above Rs 544 billion (April 2017), which is about Rs 590 billion.

The unmet need of cash in the first fortnight of the financial year has potentially caused the cash shortage.

Apart from low supply from the RBI, the reasons, bankers and experts said, are the slow but steady disappearance of the Rs 2,000 note from the freely moving part of the cash in circulation and the inability of automated teller machines to cater to the increased cash demand in the first fortnight of April with the help of lower denomination notes.

An analysis of weekly data from the RBI shows there are occasional peaks in currency supplied to the economy round the year but most are concentrated during March-April and October-November. Neelkanth Mishra, economist and India equity strategist at Credit Suisse, recently pointed this out in a report.

A large chunk of budgetary spending and payments from the government to implementing agencies happens in the last fortnight of the financial year (end of March) and these are get encashed immediately, a banker said.

"Pensions and reimbursements are encashed in the first few weeks of April, which adds to the April demand," he added.

Discussions with government agencies that run centrally-sponsored schemes that involve movement of money from Centre to states and subsequent encashment at the district/taluka level yielded that the first tranche of payments towards the schemes happens before April 10.

Similarly, in October and November, there is an extra need for cash, owing to the second tranche of government to government transfers, in addition to increased spending during Diwali, and the beginning of traders' New Year and mahurat trading, experts said.

In all previous years, at least one note of high denomination -- Rs 1,000 till 2016, and Rs 2,000 in 2017 -- was available to provide cash needs for the increased spending during the April and October cash peaks.

This time, the reduced velocity of the Rs 2,000 note created the problem since the increased demand had to be met with the available notes of Rs 500, Rs 100 and Rs 200 denominations.

"We are refilling our ATMs thrice a day at some places so that customers do not face a shortage since due to small denomination notes, cash in a particular ATM is lasting for only 4 to 5 hours," said J Swaminathan, chief general manager, SBI (Telangana).

Consider this example of a typical ATM to understand what can happen if a high denomination note is not available.

An ATM has four bins or cassettes, each of which can contain 2,000 notes.

If the four bins are filled with Rs 2,000, Rs 500, Rs 200 and Rs 100 notes each, the ATM can dispense Rs 5.6 million in total.

If the Rs 2,000 note is not available, as is the case currently, and the Rs 100 note replenishes its bin, then the ATM can dispense a maximum of Rs 1.4 million.

Non-availability of a high denomination note thus diminishes a bank's ability to circulate cash.

A banker with a public sector bank said that a portion of the currency in circulation is not moving freely through the banking system, and that most of it is in the form of Rs 2,000 notes.

"Once the purpose of maintaining cash to pre-demonetisation levels was achieved by the RBI, it stopped printing the Rs 2000 note," he said.

On the issue of recalibration, Swaminathan said only 40 per cent of ATMs in Telangana -- where the crisis has been the most acute -- have been recalibrated for the Rs 200 note.

"A technician needs at least 300 to 400 notes of a new denomination to calibrate a machine," he said, adding that its supply has been slow.

Photograph: Reuters