The rise of cash a transient symptom – The Economic Times

Clipped from: https://economictimes.indiatimes.com/opinion/et-editorial/the-rise-of-cash-a-transient-symptom/articleshow/82612200.cmsSynopsis

The huge increase in India’s cash in circulation during the pandemic is no cause for alarm. Central bank data shows that currency in circulation touched a decadal high of 14.6% of GDP in 2020-21 against a low of 8.26% in 2016-17 (following demonetisation).

The huge increase in India’s cash in circulation during the pandemic is no cause for alarm. Central bank data shows that currency in circulation touched a decadal high of 14.6% of GDP in 2020-21 against a low of 8.26% in 2016-17 (following demonetisation). However, the spike is likely to be transient, not a shift in savings behaviour. Typically, people tend to save more during an economic slowdown, and income uncertainty. This was seen during the global financial crisis in 2007-09. In a pandemic, people could hoard cash to avoid frequent forays outside, too. Only a part of household savings is financial (bank deposits, shares, company deposits, mutual funds) and the balance goes towards physical savings (such as real estate). Physical savings, though, could be less attractive and less feasible in a pandemic year: you put off house-building.

An RBI paper shows that the household financial savings rate touched 21% in Q1 2020-21 when real GDP contracted 24%. Some discretionary consumption picked up, and that, in turn, led to the moderation in financial savings in the second quarter. The break-up shows that household financial savings in the form of bank deposits rose during the second quarter of 2020-21, but deposits with non-banks declined during this period. The subscription rate to insurance funds by households remained high due to the pandemic. Ditto for the subscription rate to pension and provident funds. However, savings in mutual funds declined during the second quarter.

Simultaneously, digital payments have surged, showing people are holding on to cash as a store of value but using less of it as a means of payment. As vaccination proceeds apace and the pandemic retreats, sooner or later, things would revert to normal.

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