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Cash crunch: Experts discuss likely reasons for cash demand

Updated : April 18, 2018 08:32:16 IST

After NDA government and union finance ministry assured people not to panic on unusual spurt in currency demand, R Gandhi, Former Deputy Governor, says that public is going back to pre-demonetisation behaviour.

"Looks like public wants to go back to their old way of doing the things that is going back to pre-demonetisation behaviour," R Gandhi. "That would mean that the demand of cash not just for ordinary normal transactions, but also for keeping their savings in cash."

He also said the government thought that they have brought change in their saving behaviour in preferring non-cash savings rather than cash savings looks like that expectation has not been realised.

Talking on the extent of cash withdrawal, he said, "One thing if you look at correspondingly during the last quarter, the increase in the credit has suddenly picked up. If you look March and February figures, credit has grown in an economy, in the bank system, it is phenomenal. Something like Rs 4 lakh crore or like that.

“There will demand in cash, there could be withdrawal of those credit, so that is possible. Sudden increase in the last three months that could be one of the outcome could be because of the large-scale increase in credit," said R Gandhi to CNBC-TV18.

A Prasanna, Chief Economist, I-Sec PD, says credit growth may be one of the reasons for the currency demand, "If you look at this credit growth in historical context it doesn’t sound big but ultimately we have to do incremental analysis so we were transitioning from a period of both weaker growth and slower credit growth."

“It is also possible the seasonal patterns are shifting. Normally in India Q3 is when the currency demand peaks out because of festival season and then the Q4 is usually slightly less than Q3 but it is possible the seasonal patterns have shifted,” he added.

A Prasanna also said that incentives given by government to use non-cash alternatives are not doing their job as people are sub consciously trying to keep more cash maybe lower denomination.

He said, "Prepaid Payment Instruments (PPIs) PPIs related explanation theoretically is right. It is not supported by the data. The payment through the digital means are increasing only."
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