Circulation of cash has spiked in India in the last few months.
As of March 18, currency in circulation in Asia’s third largest economy was higher by 15% compared to a year ago—the highest annual increase since fiscal 2011—according to data from the Reserve Bank of India (RBI).
No one knows exactly why this is happening, but there are a couple of theories floating around.
Some, including the Reserve Bank of India (RBI) governor Raghuram Rajan, believe that upcoming elections in Assam, Kerala, Tamil Nadu, West Bengal, and Puducherry may be a reason.
In the past, currency circulation has increased ahead of elections, typically due to alleged payment of cash for votes, mainly in the hinterland. “Around election time, cash with the public does normally increase,” Rajan told reporters after announcing the monetary policy on April 5. “You can guess as to reasons why, we can also guess.”
Rajan estimates that around Rs60,000 crore ($9 billion) of extra cash was in circulation around the country.
But the head of India’s largest lender doesn’t quite agree.
“We have seen even bigger elections in earlier years but the increase in currency with the public has not been that high,” Arundhati Bhattacharya, chairman of the State Bank of India (SBI) told the Times of India newspaper last week. “This time it is hurting our deposit growth and, after a long time, our deposit growth is less than advances.”
An SBI research report argued that the rise might also have something to do with a rumour that currency notes of higher denominations are soon going to be redundant.
“There are suggestions in public domain and even analyses that are suggesting that higher denomination notes may be replaced. We believe (that) as a result of that people may be using more of high-value currency to purchase safe haven assets,” the report said.
Others reckon that this might be a sign of the economy’s revival. For instance, in a note on April 4, analysts at Credit Suisse said:
“This has happened at a time when deposit growth is at multi-decade lows. Such sustained divergence between currency in circulation and deposit growth is rare: it has occurred only thrice before in the last two decades. These were periods when economic momentum started to revive, raising the question, is the economy picking up again?”
But no one is sure.