MUMBAI: Currency with the public has dropped by Rs 1.56 lakh crore to nearly Rs 32.2 lakh crore as on July 28 from Rs 33.7 lakh crore on May 19. The decline has been due to RBI’s move to withdraw Rs 2,000 notes — with most now deposited in banks.
Consequently, banks have added Rs 9.7 lakh crore to their deposit base, which now stands at Rs 190.2 lakh crore, marking an increase of 5.4% during the current fiscal up to July 28. This is nearly double the deposit accretion of Rs 5 lakh crore (3.2%) during the same period in the previous year. The bank deposit growth does not include the impact of the HDFC-HDFC Bank merger.
Given the spurt in bank deposits, RBI has imposed an incremental cash reserve ratio of 10% on the deposits that banks have added between May 19 and July 28. This move aims to impound over Rs 1 lakh crore of deposits as well as drain out surplus liquidity. Bankers, however, say that the surplus in the system is temporary which means that the incremental CRR (iCRR) will push up interest rates.
“Experience during demonetisation shows that cash that has been returned to a bank account because of currency withdrawal will soon be withdrawn,” said a senior banker. According to Suman Chowdhury, chief economist at Acuite Ratings, liquidity will be tighter than expected due to the iCRR, and this may lead to an increase in short-term rates.
“Since the announcement (Rs 2,000 note withdrawal), currency in circulation has declined by Rs 1.3 lakh crore up to 14 July. This is in line with our assumption that there would be a Rs 1.5-lakh-crore injection of liquidity into the system by September. Going forward, we would expect a reversal of this, as CIC usually picks up around election season,” said Nathan Sribalasundaram of Nomura in a report released in July.
