India has experienced an unexpected decrease in its Currency in Circulation (CIC) during the first half of the current financial year following the withdrawal of Rs 2,000 notes, marking a rare occurrence not seen in at least a decade.
As of March 31, 2023, the CIC stood at Rs 33.78 lakh crore, but by September 22, it had dropped to Rs 33.01 lakh crore, a difference of approximately Rs 76,658 crore.
In the preceding two fiscal years, the CIC had shown an upward trajectory, increasing by Rs 33,357 crore in FY23 and Rs 84,978 crore in FY22. However, in the Covid-19-affected FY21, it surged by Rs 2.43 lakh crore between April and September.
The Rs 2,000 movement
The reduction in CIC during the current fiscal year can be largely attributed to the withdrawal of Rs 2000 banknotes, a measure announced on May 19. The latest data from the Reserve Bank of India (RBI) indicates that Rs 2,000 notes worth Rs 3.46 lakh crore have been returned, constituting 96 percent of the Rs 3.56 lakh crore in Rs 2,000 notes in circulation until May 19.
Despite the RBI injecting Rs 2.69 lakh crore into the economy between April and September, the reduction occurred because the amount added was less than the amount withdrawn.
Of the Rs 2000 banknotes returned, only 13 percent were exchanged, while the majority were deposited in bank accounts and subsequently moved to the RBI’s vault.
Individuals, after depositing Rs 2000 notes in banks, withdrew smaller amounts of cash for transactions compared to previous periods. The surge in digital transactions has lessened the reliance on cash, ensuring that the withdrawal of Rs 2000 notes had no significant impact on the economy.
However, there is a possibility of higher currency leakage (an increase in currency in circulation) in the second half of FY24 as individuals may begin withdrawing cash after depositing Rs 2,000 notes.
The rise in digital transactions has contributed to a slowdown in the growth of currency in circulation in recent years. In FY23 and FY22, CIC growth remained in single digits, a departure from previous years.
