There could be just two explanations for the shortage of cash in Indian ATMs. One, there is a gap between supply and demand, Two, cash is king again. The first explanation seems unlikely because the Reserve Bank of India (RBI) has put out more money in the banking system than the pre-demonetisation period. According to the RBI data, on 6 April there was Rs 18.17 lakh crore in the banking system. This is marginally more than the 17.6 lakh crore in circulation before 8 November, 2016, when old currency notes of Rs 500 and Rs 1000 were banned by the government.
Under normal circumstances this currency in circulation would have been adequate for the existing demand, more so because of the increased thrust on digitisation and a less-cash economy. Yet, ATMs in many states have become dry.
Some officials have suggested that ATMs in some states have become dry because of an imbalance in supply, implying that some states got more cash while others less from the RBI. But, this is also an unlikely reason because of the sheer number of states facing a cash crunch and the fact that it is a recent phenomenon.
So, what could be the reason behind the shortage? The only viable explanation at the moment—considering the RBI argument of adequate currency in circulation and more digitisation—is this: Cash is king again. Indians have forgotten the lesson of demonetisation—those who hoard cash tend to suffer—and have turned the clock back.
There is increasing evidence that cash is being stocked at home or is being channeled into other assets—not through, mind you, the banking channel but via cash transactions—in spite of the demonetisation experience. One of the giveaways of the current trend is the complete disappearance of Rs 2,000 notes from the market, even though the RBI says they are almost 30 percent of the currency in circulation.
Cash disappears from the market generally before major elections. That is when it is needed the most to finance campaigns over and above the limit set by the Election Commission of India. But, this is not the case this time. Yes, elections are due in Rajasthan, Madhya Pradesh and Chhattisgarh in December. But, it is too early to build a war chest for the semi-finals.
So, the only reason money is disappearing is this: People fear that their money is safer at home than in banks. This fuel could have been fueled by the string of scams and frauds that have hit banks, leading to rumors that some of them could go belly up soon. One instance that comes to mind of this lack of faith in the banking system is the run on ICICI Bank in 2008. Back then, scared of rumors that the bank was about to go bankrupt, account holders withdrew crores of rupees overnight from the bank’s branches.
This year too the trigger appears to be a combination of factors, starting from the proposed bill that reduced a bank’s liability in case it failed and the rising NPAs. This run on banks may have been compounded by the activity in the agriculture sector where crops are being sold in the market, leading to a demand for cash.
The good news for the government in spite of this chaos is this: The crisis is temporary. Once the finance ministry assures people that Indian banks are still in robust health, the money being currently withdrawn is bound to return to the banks.
Updated Date: Apr 18, 2018 08:04 AM