News

Published: February 26, 2024
Updated: February 26, 2024

Current growth declines to 3.7%, significant decline as compared to previous year - RBI’s decision to withdraw 2000 Rs notes likely played key role

Overview of Currency Growth Trends

Recent reports indicate a notable decline in the growth of currency in circulation, which dropped to 3.7 percent for the week ending February 9, a significant decrease from 8.2 percent recorded a year earlier. Currency-in-circulation (CiC) encompasses all notes and coins in circulation, excluding cash held by banks.

Factors Driving the Dip

The decrease in currency circulation is partly attributed to the Reserve Bank of India's (RBI) decision to withdraw Rs 2,000 denomination banknotes from circulation. This move has had a discernible impact on the overall cash flow within the economy. Additionally, commercial banks reported a surge in deposits in January, likely influenced by the withdrawal of Rs 2,000 notes.

Reserve Money Dynamics

Reserve Money (RM) growth has also decelerated, standing at 5.8 percent as of February 9, 2024, compared to 11.2 percent a year earlier (8.8 percent adjusted for the first-round impact of changes in Cash Reserve Ratio). RM comprises various components, including CiC, banks' deposits in RBI, and other deposits with the central bank. The slowdown in CiC growth underscores the effects of withdrawing Rs 2,000 banknotes.

Timeline of Withdrawal

The RBI announced the withdrawal of Rs 2,000 denomination banknotes on May 19, 2023, triggering a process of currency transition within the economy. By January 31, approximately 97.5 percent of Rs 2,000 banknotes had been returned to the banking system, leaving only a nominal amount with the public.

Transition Process

Initially, individuals and entities holding Rs 2,000 notes were instructed to exchange or deposit them in bank accounts by September 30, 2023. This deadline was later extended to October 7, 2023. Subsequently, deposit and exchange services for these notes were discontinued at bank branches.

Background on Rs 2,000 Notes

The introduction of Rs 2,000 banknotes in November 2016 followed the demonetization of the then-existing Rs 1,000 and Rs 500 denominations, marking a significant shift in India's currency landscape. The withdrawal of Rs 2,000 banknotes has had a discernible impact on currency circulation dynamics, reflected in the notable decline in CiC growth. As the transition process continues, stakeholders will monitor the evolving cash flow trends and their implications for the broader economy.