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| Edited By: Arjun Parthasarathy |Source: DNA |Updated: Mar 18, 2018, 03:03 AM IST
Currency notes in circulation in the country have increased by 21% over the last one year.
In absolute terms, they have gone up from Rs786,266 crore as of April 30, 2010, to Rs952,704 crore as of April 30, 2011 — an increase of Rs165,438 crore, according to the Reserve Bank of India (RBI) data.
The rise is a factor for tight banking system liquidity, which has been consistently negative now — as shown by bids at the liquidity adjustment facility auction of the RBI.
Banks are borrowing from the RBI on a daily basis to meet their funding requirements.
In theory, tight liquidity is anti-inflationary, which should have helped RBI contain rising inflation expectations.
However, inflation, as measured by the Wholesale Price Index, is running at close to 9% levels, way above policymakers’ comfort zone.
The notes in circulation can be defined as the money gone out of the banking system, which is circulating in the form of cash.
India remains a significantly cash-driven economy — a lot of cash is used for transactions instead of debit or credit cards.
In developed countries where debit and credit card usage is high, money stays within the banking system.
An increase in notes in circulation along with tight banking system liquidity and a rise in inflation gives rise to the theory that black money is increasing in the economy.
The first culprit in black money transactions is the real estate sector. As everyone knows, most of the real estate transactions involve a huge component of cash.
Given that price of property has increased (by 25% over the last three years), the value of cash element has also gone up. This is one factor behind the increase in currency in circulation.
The other is gold for loan schemes. The rise in gold prices, which is prompting Indians to pledge their gold and take loans to buy consumer durables.
Gold loans are usually given out in cash especially to small borrowers and this is contributing to increase in cash in circulation.
The rural economy is cash-driven and the rise in wealth in the smaller towns is leading to higher volumes of cash transactions.
The money given by the government for minimum support price (for crops) and rural employment guarantee scheme is moving out of the banking system into cash. This is another cause for higher notes in circulation.
Needless to say, once the money goes out of the system, it is not taxed, so, by default, it is treated as black money.
Black money increases the purchasing power of the consumer but decreases the ability of the banks to give loans, leading to the money multiplier coming off (banks leverage on deposits to give loans, which comes back in the form of deposits, which is again leveraged). This partly explains why monetary transmission does not work in containing rising inflation expectations.
