Despite rise in digital payments, currency in circulation on the rise: HSBC Research

Our Bureau | | Updated on: Jun 24, 2022

| Photo Credit: Denis Vostrikov

‘Distress in India’s informal sector could be a contributing factor’

Currency in circulation has been on the rise despite the huge adoption and usage of digital payments in the country.

A new report by HSBC Research has said that apart from rising inflation, distress in India’s informal sector could be a contributing factor to the recent spurt in currency in circulation.

“India’s large informal sector has suffered back-to-back blows in recent years. We believe that the distress in the informal sector is pushing it increasingly towards cash-based activity, especially those activities that end up falling outside the tax net,” said the report.

The lockdowns of 2020 impacted economic activity and even before the country’s small firms could recover fully, they were hit by the large commodity price shock in early 2022.

“Small firms are not as energy efficient as large ones and don’t have as much bargaining power in the market for inputs. As a result, small and informal firms have been losing market share, and their profitability has been hurting,” said the report.

Since early 2022, currency in circulation has been on the rise, it noted, adding that this sits oddly with the ongoing surge in digital payments.

While traditionally rural demand has been a key driver of currency in circulation, this time around, real rural wages are falling, the report added.

“Inflation raises the demand for cash in hand to meet regular expenses,” it said, adding that rising inflation explains only 40 per cent of the rise in cash demand.

CPI has risen 3.3 per cent since the start of the year. Currency in circulation has risen 8.1 per cent at the same time.

“Something else is at play,” it said. According to data with the Reserve Bank of India, currency in circulation rose to ₹32,38,417 crore by June 10, 2022, from ₹31,33,716 crore as on March 31, 2022. It was at ₹29,63,957 crore as on June 11, 2021.

Meanwhile, digital payments, too, have been on the rise, with the Unified Payments Interface registering 595 crore transactions worth ₹10.41-lakh in May this year.

According to the HSBC report, a growing formal sector can co-exist with a weaker informal sector.

“In fact, India is in the midst of a two-speed recovery. As for GST revenue, true that it has risen recently,” it said, noting that once it is scaled with GDP, the rise is not dramatic — and if the informal sector had not been as disrupted — GST revenue may have been higher.

If the rise in currency in circulation continues, it will lead to meaningful fall in banking sector liquidity, said the report, adding that this would come as a silver lining for the RBI, which is trying to drain rupee liquidity in a bid to control inflation.

“The rise in currency in circulation leakage may help it to buy bonds without significantly adding to outstanding liquidity. But, a word of caution here,” it noted, but cautioned that the ongoing rise in currency in circulation comes on the back of informal sector distress.

“Eventually, this needs to be addressed,” the report stressed, adding that the fiscal deficit needs to fall so that its funding is not too dependent on the RBI’s helping hand.

Published on June 24, 2022
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