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25-Sep2018

CiC slows down since May on higher fuel prices, RBI's intervention: SBI Research

With higher fuel prices and Reserve Bank of India's (RBI) intervention in forex market, the State Bank of India (SBI) Research in its latest report stated that the currency in circulation (CiC) has seen some slowdown in expansion since May. It added CiC increased exponentially after the note ban in November 2016 under which as many as 99.9% of them returned to the system. As per the report, CiC increased from Rs 9 trillion in January 2017 to Rs 19.5 trillion as of 14 September this year. But since the beginning of May 2018, the same has been in the range of Rs 19-19.6 trillion.

SBI Research said that one possible reason can be people may be cutting back discretionary spending with the recent spurt in fuel prices, mostly in rural areas. It also said the other factor could be to the extent RBI selling dollars directly from its foreign exchange reserves to designated dealers/banks thereby withdrawing rupee resources in return, thus reducing currency in circulation. However, it said such intervention, since taking place between banks, should not have major impact on systemic liquidity. It added that the third reason, though insignificant, could also be RBI replacing soiled notes.

The report further noted that the decline in CiC is a seasonal phenomenon but this time it seems the decline is more than just seasonal and has continued beyond August. The RBI's weekly data for the last 10 years shows a pattern in CiC decline in the last fortnight of every July, which is partly explained by the low cash demand from the agriculture sector. The demand for currency increases after the monsoons as the harvesting begins in October followed by Rabi sowing, eventually giving rise to cash requirement. Besides, the festive season also brings along its natural demand, which gets accentuated with buying of gold, automobiles, increasing the demand for currency.


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