The cash crunch is back. which is not restricted to poll-bound state of Karnataka and its neighboring states. Rather many other states have been grappling with cash shortage, including Delhi/NCR and Mumbai. 20-25% of the ATMs have run dry with little supply from RBI to replenish cash in these ATMs. While no one has been able to ascertain such a cash crunch, there are multiple reasons being cited to substantiate the reason for cash shortage but none of them seems to be authentic.
Let us analyse growth in Bank deposits during FY 2017-18 vis-a-vis 2016-17 when percentage growth in last FY was less than 7%, a five decade low, whereas it was more than 15% in the previous year. Banks indent currency requirement to RBI, based on difference between what customer deposit in their Bank account and what they withdraw from their accounts. Such a sluggish deposit growth was not anticipated by either RBI or the Government. Lower customer deposits means Bank would need more cash to meet customer demand.
Other reasons being cited for spike in cash demand is a spate of festivals; wage withdrawal for Rabi harvesting season; high cash demand in poll-bound Karnataka; hoarding of Rs 2,000 denomination notes; stoppage of printing of Rs 2,000 denomination notes by RBI and Banks have not been able to calibrate almost one-fourths of the ATMs for dispensing new Rs 200 denomination notes.
Currency circulation in the system is back to pre-demonetization level at more than Rs 18 lakh crores out of which Rs 6.7 lakh crores is in the form of Rs 2,000 denomination notes. One more theory being talked about is increase in the currency supply by Rs 45,000 crores in the first 13 days of this month against monthly withdrawal of Rs 20,000 crores on an average. Most of the explanation seems to be in realm of hypothesis, and RBI would be able to ascertain its veracity only in June when it reconciles the cash supply figures and publishes its bulletin.
Meanwhile, RBI has increased printing of Rs 500 denomination notes to cope up with the rising demand. It is expected that cash supply would get normalized in a week's time when RBI would supply adequate currency notes to the Banks. The learning from this sudden cash shortage is to equip commercial Banks with cash reserve to meet additional demand of the customers, so that such a situation doesn't recur.
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