3 years on, Indian households rebuild cash stash

DATA SHOWS INDIAN HOUSEHOLDS WERE QUICK TO ACCUMULATE MORE CASH AFTER DEMONETISATION THAN THEY PREVIOUSLY HELD

NEWDELHI: Demonetisation, announced almost three years ago, on November 8, 2016, was primarily meant to purge unaccounted wealth in cash, but more than 99% of demonetised currency came back into the financial system. Now, three years later, data released recently by National Account Statistics (NAS) shows Indian households were quick to accumulate significantly more cash after demonetisation than they previously held. This was done most likely to compensate for the depletion of their cash holdings caused by demonetisation.

In 2017-18, savings in currency accounted for 25% of the total gross financial savings of households. This was the highest since 2011-12, the earliest period for which data is available under the new series. Correspondingly, the share of deposits in gross financial savings was 28% in 2017-18, the lowest since 2011-12. This suggests that people withdrew money from banks to keep at home. Data after 2017-18 isn’t available.

These numbers are so-called flow variables, which means they reflect they change between opening and closing balances in the fiscal year. This means that demonetisation forced households to deposit in banks whatever cash they were holding.

The fact that the 2016-17 value for cash savings is negative means that liquidity was not restored completely until March 2017. Once liquidity was restored in 2017-18, households withdrew more money from banks than they normally did and replenished their depleted cash reserves.

A comparison of household savings in cash with total value of bank notes in circulation, which is a stock variable measured at the end of the financial year, makes this clear.

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