KEY TAKEAWAYS

Latest NAS data shows that the liquidity shock due to demonetisation could have increased preference for cash among India’s households, probably to replenish their cash reserves which had to be deposited in banks.

Share of cash in gross financial savings of households jumped to more than 25% in 2017-18, the year after demonetisation, the highest ever since 2011-12. Data after 2017-18 is not available.

The share of savings in cash in 2017-18, also increased significantly as value of total currency in circulation this 2017-18.

This has been accompanied by a decline in share of deposits in households savings.

Urge to increase cash hoardings could have prevented spending and triggered deflationary expectations among households, thus contributing to the current slowdown in the Indian economy.