Is cash losing its appeal post-demonetisation?

Has demonetisation reduced people’s appetite for cash? It seems so if the latest SBI study is any indicator.

Post demonetisation (after December 30), cash withdrawal has been declining rapidly from a peak of ₹52,800 crore in the week ended January 13 to ₹32,500 crore in March 24.

Even in the one-week of March 17-24, cash withdrawal declined by ₹2,000 crore, according to data available with State Bank of India.

It may be noted that withdrawals have fallen even after the removal of caps.

Historically, average withdrawals are generally higher in the first fortnight of a month because people tend to spend more. “However, even that peak has been declining since January,” SBI study shows.

“While it may be difficult to ascribe a reason, our estimates indicate that there will be a permanent liquidity injection of at least ₹1.7 lakh crore (1.1 per cent of GDP) post demonetisation,” the study said.

The data is also reflection of the extent of formalisation of the economy post-demonetisation.

According to a top executive of Vijaya Bank, people could be wary of cash transactions due to tighter vigil by the tax authorities after note-ban.

“It is also possible that big deals like property purchases are happening through cheques/electronic payments. This is resulting in lower appetite for cash,” he said.

Non-availability of cash does not seem to be a reason for lower demand for currency. Enquiries reveal that except in some pockets in Telangana, there is no cash crunch.

So it remains to be seen if demonetisation will dispel John Maynard Keynes’ liquidity preference theory, which says people prefer to keep cash on hand.