This week in banking: Cash remains the king post demonetisation, says RBI

Whether demonetisation was a success or failure, today, cash remains the king as there is more of it in the economy than there was on November 8, 2016.

Indian households are saving more now, a large part being in cash which is highest in last seven years.

This was shown by the data released by the Reserve Bank of India (RBI) in its annual report this week.

The gross financial savings in the household sector, as a percentage of gross national disposable income (GNDI), rose from 9.1 percent in 2016-17 to 11.1 percent in 2017-18, the highest in at least the last seven years, data in the report showed.

These savings had declined to 6.7 percent of GNDI in 2016-17, down from 8.1 percent in 2015-16.

As the RBI report points out, household financial savings are the most important source of funds for investment in the economy.

In form of cash, financial savings soared to 7-year high of 2.8 percent of GNDI in the same period.

These household savings in form of “currency” had declined by 2 percent during 2016-17 and was 1.2 percent of GNDI in 2011-12.

Savings in form of deposits have been declining since 2012-13 (except in 2016-17 when people deposited their scrapped Rs 500 and 1,000 in banks since November 8, 2016) mainly due to fall in bank interest rates.

Apart from individuals, household savings includes all non-government, non-corporate enterprises like farm and non-farm businesses, unincorporated establishments such as sole proprietorships and partnerships and non-profit institutions like charitable trusts, religious endowments and educational institutions.

This reflects a large part of the informal sector, including the small farms and shops and micro businesses across the country.

Even as overall gross financial savings of households are at the highest level since 2011, net savings have dropped sharply. This is due to the spike in household financial liabilities to 4 percent of GNDI – up over 42 percent from FY16.

As per RBI data, although savings in the form of shares and debentures is the highest in the past seven fiscals, it still constitutes an abysmal 0.9 percent of GNDI.

On the other hand, savings parked in pension and provident funds is back to the pre-demonetisation (FY16) level.

The currency in circulation (CIC) also stood at Rs 19.38 lakh crore as of August 17, 2018, which is higher than the pre-demonetisation levels.

Consequently, India’s currency to GDP ratio is once again among the highest, not only compared to peer emerging market economies but also advanced economies.

The demonetisation had sucked out about 86 percent of the currency from circulation.

As per RBI data, almost 99.3 percent of the scrapped notes were returned by people to banks.