India stops spending cash? See what fuel prices made you do!

Inflation and higher oil prices may have dampened the currency in circulation (CIC) which was increasing exponentially as expected post demonetisation. Currency in circulation is the money used by consumers, public and businesses for various transactions.

The dip in the discretionary spending of people may have resulted in the cash with the public remaining static, according to State Bank of India's report on the economy.

The CIC increased from Rs 9 lakh crore in January 2017 to Rs 19.5 lakh crore as on September 14 this year. However, since the starting of May 2018, it has been in the range of Rs 19.0-19.6 lakh crore, according to the latest data released by Reserve Bank of India(RBI).

"One possible reason could be people may be cutting back discretionary spending with the recent spurt in fuel prices, mostly in rural areas," SBI Ecowrap said in a report. RBI is selling dollars directly from its foreign exchange reserves to designated dealers/ banks, thereby withdrawing rupee resources in return, thus reducing money currency in circulation, the report added.

However, such intervention, since taking place between banks, should not have a major impact on systemic liquidity. The other reason, though insignificant, could also be RBI replacing soiled notes.

"Whatever is the reason for such trend, this implies that bank deposit growth will at least not face pressure in the interregnum with less of a currency leakage as of now," the report added. The latest RBI data on bank deposit growth has shown that bank deposits grew less than 10% on a year-on-year basis in between August 18, 2017, and August 17, 2018.

The decline in CIC, seen in the last fortnight of every July, is partly explained by the low cash demand from the agriculture sector. "The demand for currency will increase post-monsoon as the harvesting begins in October followed by rabi sowing, eventually giving rise to cash requirement. The harvest requires labour wages distribution, hiring of equipment and rabi sowing leads to overall requirement of money for purchase of seeds, fertilisers," the report added.

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The festive season also brings along its natural demand, which gets accentuated with buying of gold, automobiles, etc, increasing the demand for currency. The recent spurt in fuel prices may result in a cut in discretionary spending by households.

Source: DNA Money