RBI says it’s comfortable with currency in circulation

MUMBAI: The Reserve Bank of India said it’s comfortable with the currency currently in circulation, reaffirming the contention that notes won’t get back to pre-demonetisation levels.

“The currency in circulation is showing early signs of normalisation,” said deputy governor Viral Acharya at the post-policy media briefing. “There remains however much surplus liquidity in the system that the Reserve Bank has been managing,” said Acharya.

Total currency in circulation was Rs 15.41 lakh crore on July 28, according to central bank data, about 86 percent of the amount on November 4 last year. Four days later, the government had announced the decision to pull Rs 500 and Rs 1,000 notes out of circulation to eradicate black money, counterfeits, corruption and terror financing.

“We were clearly remonetising and we had to wait and assess when the system is actually reaching a stable level of currency in circulation,” said Acharya.

“In one way, I think something is stable when it bounces around its level and I think it’s only recently that this has started happening. Otherwise we have been remonetising at a certain pace and currency in circulation has been going up,” said Acharya.

The currency in circulation now is about 9% of gross domestic product, down from more than 12% previously. This typically ranges between 5% and 8% of GDP in developed nations.

Lower currency to GDP ratio ensures that currency notes are used primarily for transactions, since high-value notes tend to be used to pay bribes. It is believed that the lesser the currency in circulation, the lower the chances of corruption.

The pace of remonetisation has been slowing since June. From more than Rs 25,000 crore a week until mid-May, the growth in currency in circulation has dipped to less than Rs 10,000 crore of late. Economists attribute this to the RBI’sfocus on printing lower denomination notes and discontinuing high-value Rs 2,000 notes.

“While the seasonality every year suggests a fall in the pace of weekly CIC (currency in circulation) around July-August, the recent fall could partly be attributed to the supply side constraints given the reduced printing run rate, as RBI has started to print Rs 200 notes and stopped the printing of Rs 2,000 notes,” Upasana Bharadwaj and Madhavi Arora of Kotak Economic Research said in a note to clients.

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