Demonetisation impact: India’s cash to GDP ratio now compares with nations like Germany and France, says RBI

RBI annual report says demonetisation has helped India’s cash to GDP ratio compare with advanced economies.

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Old Rs 1000 and Rs 500 notes were scrapped on November 8, 2016. (Reuters file)

The Reserve Bank of India’s annual report for the year 2016-17 says demonetisation has helped the country’s currency in circulation (CIC) to GDP ratio compare with advanced economies like Germany and France.

Last year, the cash to GDP ratio in India was 12.2%. It came down to 8.8% by the end of March 2007 as demonetisation hit the total high value currency in circulation. The demonetisation decision announced by the government on November 8 had scrapped old high-value currency notes of Rs 500 and Rs 1000.

In the weeks following demonetisation until December 31, 2016, the RBI pumped in 23.8 billion pieces of bank notes into circulation, which was Rs 5,540 billion in value. By the end of March 2017, CIC had reached 74.3% of the peak. ”

“At end-March 2017, CIC amounted to 8.8 per cent of GDP, down from 12.2 per cent in the previous year. At this level, India’s currency to GDP ratio compares well with a host of advanced and emerging market economies (such as Germany, France, Italy, Thailand and Malaysia),” the RBI report said.

A screeshot from RBI Annual Report 2016-17
A screeshot from RBI Annual Report 2016-17

Just a week before the announcement of demonetisation decision, India’s cash in circulation was at an all-time high of Rs 18 trillion.

Last year, India’s cash to GDP ratio, which is an indicator of the amount of cash used in the economy, was much higher than developed economies including the US, UK and Euro but below Japan (around 18%), PTI had reported on November 27, 2016. In contrast, an emerging economy like Indonesia had a much lower ratio of around 5%. Experts believe that high cash to GDP ratio is the biggest impediment in India’s march towards becoming a cashless economy.

The RBI annual report also revealed that only around 1.4% of scrapped Rs 1,000 notes didn’t come back into the banking system post demonetisation. Out of 632.6 crore pieces of Rs 1,000 currency notes in circulation, 8.9 crore haven’t yet returned to banks.

According to the report, around 89 million old Rs 1000 notes were in circulation in March 2017, while in March 2016, around 6.3 billion Rs 1000 notes were in circulation. This means that 89 million (or 8.9 crore) of Rs 1000 notes, which were banned by Centre in November, didn’t return to the banks.

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