Pace of remonetisation of economy seems to be slowing

MUMBAI: The pace of remonetisation appears to be slowing down as net addition to the stock of currency in circulation is growing at a slow pace.

Currency in circulation rose slightly to Rs 11.6 lakh crore in the week ended February 24, according to the latest data from RBI. But this is still 35% lower than the cash and currency levels before the high value note ban since November 11 and 30 percent lower than what it was during the same time last year.

After the December 30 deadline of surrendering old Rs 500 and Rs 1000 notes, the currency in circulation has risen by Rs 2.2 lakh crore. This includes pumping in of all value currency notes by the central bank. The Reserve Bank does not release high frequency note-wise data nor has it indicated the amount of banned notes that it has collected.

The pace of remonetisation is slowing down, according to a report by SBI Research. If one takes the value of replenished notes as an indicator which has just increased to Rs 8.8 lakh crore or 57% until mid February from Rs 8 lakh crore or 52% by January-end, the report said.

The government’s decision to ban Rs 500 and Rs 1000 notes has had an impact on the way the Reserve Bank manages liquidity on the day to day basis as huge amounts of cash in the system was converted into deposits with the banks which added to the banking sector liquidity.

“The large overhang of liquidity consequent upon demonetisation weighed on money markets in December” said the Reserve Bank in its monetary policy committee ( MPC) notes released last week. The Reserve Bank is however seems satisfied with the pace of remonetisation.

“From mid-January, rebalancing has been underway with expansion of currency in circulation and new bank notes being injected into the system at an accelerated pace” the MPC notes said. Throughout this period, the Reserve Bank’s market operations have been in liquidity absorption mode.