The latest data reveals a surprising trend in India’s financial landscape. Almost six years post the government’s announcement of demonetisation in 2016, the quantity of currency held by the public has witnessed a startling upsurge. Astonishingly, this increase accounts for around 74% from the days preceding the declaration of demonetisation. The calculation of this amount is determined after subtracting cash with banks from the total Currency in Circulation. Despite measures by the government and the Reserve Bank of India (RBI) advocating for a “less cash society”, restrictions on cash usage, and promoting digital payments, cash within the system has shown a steady escalation.
Understanding ‘Currency in Circulation’
Before diving deeper into the topic, let’s first comprehend the meaning of ‘Currency in Circulation’. This term signifies the cash within a country that is physically being used to carry out transactions between businesses and consumers. The factor of currency in circulation is an essential component of a country’s money supply.
Monetary authorities of central banks meticulously evaluate the amount of physical currency in circulation because it represents one of the most liquid asset classes. The RBI holds the sole authority to issue currency notes in the country. Conversely, the Government of India is in charge of issuing coins. They guarantee a steady supply of coins to the Reserve Bank as per demand.
The Concept of Money Supply
Money Supply, a frequently used term, refers to the total stock of money moving among the public at any given time. It’s imperative to distinguish between the total stock of money and the total supply of money. The total supply of money only includes that part of the total stock which is held by the public at a specific point in time.
The circulating money involves various forms such as printed notes, the currency itself, money present in deposit accounts, and other liquid assets. The RBI declares figures for four alternative measures of money supply, namely M1, M2, M3, and M4. Among these, M3 is the most widely used measure and is also known as aggregate monetary resources.
Measures Impacting Money Supply in the Economy
Certain measures can result in an increase in the money supply in the economy. Some actions that result in this escalation include printing more money, reducing interest rates, quantitative easing, decreasing the reserve ratio for lending, and the Central Bank’s purchase of government securities. Moreover, an expansionary fiscal policy and borrowing by the government from the Central Bank can also contribute to increased money supply.
Impact of Withdrawals on Aggregate Money Supply
An intriguing aspect of money supply relates to how withdrawals from your Demand Deposit Account at your bank can impact it. Contrary to what one might think, withdrawing a substantial amount will not alter the aggregate money supply. Hence, if you withdraw INR 1,00,000 in cash from your bank account, the immediate effect on aggregate money supply in the economy will be unaltered.
To wrap up, understanding these financial concepts and trends not only gives a detailed insight into the country’s economic status but also emphasizes the importance of prudent financial decision-making at macroeconomic levels. The upward trend in currency circulation despite digital advancements highlights the pivotal role that cash still plays in our economies. This underlines the need to create a balanced approach between traditional and modern means to foster growth and stability.