Cash is king again? India’s withdrawals surge 12% in early April, highest since post-demonetisation
Abhishek Upadhyay, co-head of research at ICICI Securities Primary Dealership, said foreign exchange demand has been “a little weak” relative to GDP growth in recent years, setting the stage for a sharper recovery, helped by strong rural demand.
The reduction in goods and services tax applied to various daily use products in September also increased demand.
Soumya Kanti Ghosh, group chief economic advisor at State Bank of India, said low interest rates further support the use of cash, especially in rural areas where spending propensity is higher.
He added that higher prices in precious metals may also have increased the amount of currency in circulation through the recycling of gold and silver from households.
If the increase continues, it could pose a problem for the excess liquidity in the banking system that the central bank is trying to maintain to support economic activity. HDFC Bank expects excess liquidity to average around 1% of average deposits in the first half of the current financial year, then decline to 0.5% in the second half.
“However, if CIC continues to remain high due to a rise in inflation, further acceleration in rural demand and any impact from state elections, liquidity balances may move towards the lower end of the forecast range,” said economist Sakshi Gupta.
The RBI had said in March that keeping the surplus within the range of 0.6 per cent to 1.1 per cent of deposits helped keep the gap between the weighted average call rate and the policy rate narrow.
Dhiraj Nim, economist and currency strategist at ANZ, said the RBI’s infusions have kept banking liquidity in surplus but going forward, the RBI dividend will support this while the CIC will deplete it further.
