Cash still the king. Cash savings highest in a decade

Rupee-The surge in cash savings at the cost of deposit growth has helped prop up financial assets, according to RBI.

Demonetisation seems to have had no impact on cash savings by the Indian household, Savings are again going out of the banking system with share of savings in form of cashtouching decade high and that of deposits touching decade lows.

While currency in circulation is at Rs 19.38 lakh crore is much higher than pre-demonetisation levels, household savings in form of cash and currency has surged to 2.8 per cent of national income, the highest in almost a decade. At the same time share of savings in bank and corporate deposits dipped to a decade low of 2.9 per cent.

After contracting in FY’17, cash savings by Indian household rose to 2.8 per cent of gross domestic national income(GDNI) in FY’18, according to the preliminary data released by the Reserve Bank of India.

Significantly, the currency in circulation is now much higher than the pre-note ban levels at Rs 19.38 lakh crore as of August 17,2018.

Clearly, the cash that had got converted as deposits with banks immediately after the note ban has gone back out of the banking system. The drop in interest rates has ended up with individuals shunning bank deposits with deposit growth in the banking system touching lowest in five decades in FY’18. The households’ share in savings in form of deposits shrank to 2.9 per cent from 6.3 per cent the previous year.

RBI data indicates, the share of currency in household savings is the second highest after deposits. Contrary to popular notion savings parked in stocks is still less at 0.9 per cent and that in pension and provident funds is 2.1 per cent.
The surge in cash savings at the cost of deposit growth has helped prop up financial assets, according to RBI. “As per the Bank’s preliminary estimates, net financial assets of the household sector increased to 7.1 per cent of GNDI in 2017-18 on account of an increase in households’ assets in the form of currency, despite an increase in households’ liabilities.”

Monetary policy transmission which was seen improving in recent months might again slow down as cash moves out of the banking system according to an economist with a local bank.

India’s currency to GDP ratio moved up to 10.9 per cent in 2017- 18, returning to being amongst the highest levels of currency usage in peer emerging market economies and advanced economies, RBI said.