Covid uncertainty led to unusual surge in demand for currency: RBI

Covid uncertainty led to unusual surge in demand for currency: RBI

The Covid-19 outbreak and resultant uncertainty led to an unusual surge in currency demand, along with deceleration in aggregate deposits, the Reserve Bank of India (RBI) said in its annual report for 2019-20. This was despite monetary and credit conditions moderating through the year under review and accompanied by a deceleration in aggregate deposits. Credit growth also weakened during the year, with deceleration in all major sectors, the report said.

“The year ended with a surge in pandemic-related rush to cash…the currency-GDP ratio increased to its pre-demonetisation level of 12% in FY20 from 11.3% a year ago, indicating the rise in cash-intensity in the economy in response to the pandemic,” the RBI said. There was an unusual rise in month-over-month (m-o-m) CiC variation during March-June 2020 vis-à-vis the corresponding period in previous years. The intensity of cash demand was greatest in the month of May at close to Rs 1 lakh crore, as against about Rs 20,000 crore in May 2019.

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Bankers’ deposits with the RBI decreased by 9.6% in 2019-20 as against an increase of 6% in the previous year, mirroring subdued deposit mobilisation and the reduction in the cash reserve ratio (CRR) to 3% for a period of a year, effective March 28. The central bank attributed the year-on-year (y-o-y) moderation in time deposit growth to the decline in interest rates and the general slowdown in economic activity.

“The flight towards cash and a concomitant drawdown on demand deposits was particularly visible in the last quarter of 2019-20, in the wake of uncertainties related to Covid-19 pandemic,” the RBI said.

The currency-deposit ratio at 16.3% at end-March 2020 moved above its decennial average of 15.1%. The pace of expansion in currency and a rise of the currency-deposit ratio pointed to a shift in public’s preference towards holding cash in response to the uncertainty caused by the pandemic, the RBI said.

Credit offtake from banks was muted during FY20, growing at 6.1% y-o-y in a sharp loss of pace from 13.3% a year ago and from a recent peak of 15% in December 2018.

Credit demand has been ebbing away across all sectors, away from non-bank sources and towards the banking system for meeting funding requirements, the central bank said. “The unabated weakening of economic activity, coupled with deleveraging of corporate balance sheets and risk aversion by banks due to asset quality concerns, was accentuated towards the close of the year by the pandemic woes, producing a reduction in the incremental credit-deposit ratio,” the report said.

Credit growth to infrastructure contracted during FY20, mainly due to reduction in offtake by the power segment and deceleration in credit flows to the roads and telecommunications segments. Credit to the services sector decelerated sharply, primarily driven down by slowdown in credit growth to non-bank lenders, on account of concerns relating to the health of the sector. There was also a sharp deceleration in credit to the trade segment. Personal loan growth decelerated moderately.

Even as growth slowed in housing loans and credit cards outstanding, there was an acceleration in growth of vehicle loans during the year.

Among bank groups, credit growth by public sector banks (PSBs) decelerated sharply to 3.4% in March 2020 from 10.2% a year ago, reflecting stress from impaired balance sheets. Credit growth by private sector banks also slowed to 13.9% in March 2020 from 17.5% a year ago, mainly attributable to deceleration in credit growth to the services sector.

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