The Covid-19 pandemic has brought about significant changes in the financial landscape of India. The Reserve Bank of India (RBI) has released data highlighting a surge in money supply amid uncertainty. Here’s a closer look at the financial impact of Covid-19 on the economy.
Surge in Money Supply According to RBI Data
The RBI data indicates a noticeable rise in the amount of currency held by the public since the end of March, 2020, increasing by 8.2%. Additionally, the M3 money supply, which will be explained further below, observed a 6.7% increase in the first five months of the year compared to the same stretch in 2019. This increase marks the highest growth witnessed in seven years. Moreover, the currency in circulation, accounting for money with the public and in banks, witnessed a surge as well.
Contrarily, there was a decrease in savings and current account deposits by 8%. Furthermore, the Gross Capital Formation witnessed a fall by 7% in the March 2020 quarter.
Reasons Behind the Increase in Money Supply
The recent hike in money supply can be attributed to increased cash withdrawals by depositors. The Covid-19 induced lockdown and the uncertainty surrounding salary cuts or job losses instigated people to keep more cash on hand.
The Implications of Rising Money Supply
Generally, an increase in money supply is considered a leading indicator of growth in consumer expenditures and business investments. However, due to the effects of the Covid-19 pandemic, this increase is not expected to stimulate either. People have reduced their discretionary spending because they are uncertain about their permanent income. Simultaneously, lenders are becoming more risk-averse as the decreased discretionary spending is reducing the demand for manufactured and industrial goods.
Understanding Money Supply
Money Supply is defined as the total stock of money in circulation among the public at a particular point in time. However, it’s essential to note that the total stock of money differs from the total supply of money. The latter refers only to the portion of the total stock of money held by the public at a specific point in time.
The circulating money includes the currency, printed notes, money in deposit accounts, and other forms of liquid assets. The RBI reports figures for four different measures of money supply: M1, M2, M3, and M4.
Explanation of Key Terms
Gross Capital Formation is the aggregate of gross additions to fixed assets like construction, machinery, and equipment plus the change in stocks during a set period. Currency in circulation includes notes in circulation, rupee coins, and small coins. The term ‘Currency with the Public’ is computed by deducting cash with banks from the total currency in circulation.
The multiple definitions of money supply – M1, M2, M3, and M4 – reflect varying levels of liquidity. M1, which includes currency held by the public and net demand deposits held by commercial banks, is the most liquid form. M3, on the other hand, is the most commonly used measure of money supply. Also known as aggregate monetary resources, M3 includes factors such as net time deposits of commercial banks. M4 extends to include total deposits with Post Office savings organizations (excluding National Savings Certificates).
The Covid-19 pandemic has significantly impacted the economy, affecting not just the money supply but also the behaviour of consumers and lenders. The central bank’s data provides insightful analysis of these trends and sets the stage for understanding the broader financial implications in India.