Growth of currency in circulation slowest since August 2010, on economic slowdown
Moneylife Digital Team 05 July 2011

Currency growth drops to 15.8% in June, from the peak of 21% in August last year

Growth of currency in circulation in the country has slowed down to its lowest in about a year, the outcome of the slowdown in economic activity and partly the higher real deposit rates over the past couple of months.

According to a study by Nomura Financial Advisory and Securities (India), the growth of currency in circulation (CIC) came down to 15.8% year-on-year in June 2011, after falling steadily since August last year when it was at a peak of 21.2%.

"In our view," Nomura says, "the sharp fall in CIC this year is partly due to high real deposit interest rates prompting a shift away from cash to deposits. However, we believe the slowdown in economic activity and a moderation of asset prices are more important reasons as they have likely reduced transaction demand for money."

The causes for the fall in CIC are in contrast to the reasons that saw high growth last year, when price rise was a major factor. "High inflation, strong growth, low bank deposit rates and rising asset prices were cyclical factors driving increased public demand for cash from transaction and portfolio balance motives (last year)," Nomura said.

The report also mentioned that cash payments made to people in rural India, under various rural employment guarantee schemes, also contributed to the growth of CIC last year. "A structural driver was cash payments made to rural households (most of which do not bank) under the rural employment guarantee scheme."  

Currently, the economic slowdown, which has reduced transaction demand, and the rise in real deposit interest rates, which is encouraging a shift of cash to deposits, are the main reasons for the fall in CIC.

Major industry sectors such as steel, cement, oil & gas and fertilisers have seen slower growth over the past few months, mainly due to sluggish demand and rising inputs costs. (Read, "Slowdown spreading across all core sectors in India") This is the newest concern for the government which is already under pressure on account of uncontrolled inflation, besides the series of scandals that appear to have seriously dented its credibility.

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