CURRENCY PRINTING AND

CIRCULATION IN INDIA
 CIRCULATION
Circulation of cash has spiked in India in
the last few months.
As of March 18, currency in circulation
in Asia’s third largest economy was
higher by 15% compared to a year ago—
the highest annual increase since fiscal
2011—according to data from the
Reserve Bank of India (RBI).
No one knows exactly why this is
happening, but there are a couple of
theories floating around.
In the past, currency circulation has
increased ahead of elections, typically
due to alleged payment of cash for votes,
mainly in the hinterland.
In 1990, total currency in circulation in the world passed
1 trillion USD. After 12 years, in 2002 this figure was 2 trillion
USD, and in 2008 it had increased to 4 trillion USD, broken down
by country as follows:

 Eurozone – 1035.2 billion USD, 24.30% of world total

 United States – 850.7 billion USD, 19.97%
 Japan – 762.4 billion USD, 17.90%
 China – 492.3 billion USD, 11.56%
 India – 140.3 billion USD, 3.29%
 Russia – 110.8 billion USD, 2.60%
 UK – 87.5 billion USD, 2.05%
 Canada – 43.8 billion USD, 1.03%
 Switzerland – 40.3 billion USD, 0.95%
 Poland – 37.7 billion USD, 0.89%
 Brazil – 37.3 billion USD, 0.88%
 Mexico – 34.3 billion USD, 0.81%
 Australia – 32.4 billion USD, 0.76%
 Pakistan – 17.63 billion USD, 0.42

 Other countries – 537.4 billion USD, 12.89%

The rate at which currency in circulation is increasing in the
Indian economy is moving up. The rate at which deposits in the
banking sector are growing is moving down. Together, these
two factors are worsening liquidity conditions in the banking
sector, putting banks and the Reserve Bank of India (RBI) in a
spot.
While the latter is more easily explainable, the former is
confounding many in banking circles. Here’s what the data
shows.
Currency in circulation, a reflection of the cash in use, has risen
by 15.4% in 2015-16 (data for the last week of the year is yet to
come). In FY15, the growth in currency in circulation was lower
at 10.7%. The higher growth this year appears to run counter to
most factors that typically drive currency in circulation. The key
among these factors are higher inflation (which necessitates
more spending) or higher transactions in sectors like retail and
real estate (where there may be chunky payments in cash). There
are other factors like elections, which also lead to temporary
spikes.
The reason FY16’s jump in circulation is puzzling is because
inflation has not moved up compared to last year and
transactions in sectors like real estate, by all accounts, have been
down for most of the year. While state elections, such as in
Bihar, may explain a temporary spike, they don’t explain why it
has persisted.
The weekly growth rate since the start of FY16 was between 9% and
11% till November. It was only in mid-November that growth in
currency in circulation jumped to about 14%, and since then it has
remained at 12-15%. So what’s going on? There is no clear answer but
there are a few theories, some backed by data, some not.
At a macro level, one explanation could be a pick-up in urban
consumption demand. While urban demand has been stronger than rural
demand through the year, there is anecdotal evidence that urban demand
may have strengthened further in recent months. Mint’s Sapna Agarwal
hears from brick-and-mortar retailers that demand in post-festive months
has held strong and purchases are up even after discounts have ended. In
a recent conversation, a top executive at a fast-moving consumer goods
company pointed to strength in urban demand and added that premium
categories in particular are seeing strong growth.
This anecdotal evidence may point to more spending in urban areas in
recent months, which, if done in cash, could explain some of the
increase in circulation. What gives this theory credence is timing.
Retailers speak of a pick-up in demand during festive and post-festive
months, which coincides with the increase in growth rate of currency in
circulation.
In a 23 March editorial in Business Standard, Soumya Kanti Ghosh
pointed out that gems and jewellery output (as shown by the industrial
production data) has been particularly strong in FY16. He linked this to
the increased use of cash and asked whether this could point to the start
of a demonetisation trend.
A second data point that ties in to the increase in currency in circulation
is the pick-up in ATM withdrawals. Saugata Bhattacharya, chief
economist at Axis Bank Ltd, highlighted that ATM withdrawals between
April 2015 and January 2016, were at Rs.21 trillion compared to Rs.18
trillion in the same period the previous year and Rs.20 trillion in FY14.
Could this be a behavioural change driven by higher ATM charges
making people draw more cash at once, he asks.
There are other possible factors playing out in rural areas, but none seem
statistically significant. For instance, direct benefit transfers may be
putting out more cash. Also, given the pressure on rural incomes, some
have asked whether people are borrowing more from informal channels
or liquidating gold holdings. But a dip-stick survey of three people who
work in rural areas and in rural lending didn’t reveal anything that would
lead us to believe that these areas are contributing to the rise in currency
in circulation.
All of this matters because the increase in circulation is being cited as a
key reason for the liquidity tightness in the banking sector. The other
reason for the liquidity crunch is weak deposit growth. This may be
more easily explainable as deposits may be flowing towards other
avenues such as equity as suggested by strong inflows into equity mutual
funds through most of this year.
The net result is tight liquidity, which bankers believe RBI must address.
In an interview to Mint, Hitendra Dave, head of global banking and
markets at HSBC India, said this increase in currency in circulation was
a key reason for liquidity tightness. “Currency in circulation last March
was Rs.14.8 trillion. Now it is more than Rs.16.7 trillion. The difference
is about Rs.2 trillion. Assuming that the liquidity conditions have to be
maintained at the same level as last year, at least that Rs.2 trillion has to
be injected as primary liquidity,” said Dave, adding that the liquidity
injections have been far below that.
So, will RBI yield to pressure from banks and ease liquidity through a
cut in the cash reserve ratio. Bankers and economists are hopeful and say
RBI is sympathetic to the issue. But they may choose to wait until a
review of the liquidity framework—which the central bank is currently
in the midst of—is completed.
Banknotes in Circulation
Denomin
ation Volume (million pieces) Value (₹ billion)
(₹ ) Mar-13 Mar-14 Mar-15 Mar-13 Mar-14 Mar-15
1 2 3 4 5 6 7
2 and 5 11,624 11,698 11,672 46 46 46
-15.8 -15.1 -13.9 -0.4 -0.4 -0.3
10 25,168 26,648 30,304 252 266 303
-34.2 -34.5 -36.3 -2.2 -2.1 -2.1
20 3,825 4,285 4,350 77 86 87
-5.2 -5.5 -5.2 -0.6 -0.7 -0.6
50 3,461 3,448 3,487 173 172 174
-4.7 -4.5 -4.2 -1.5 -1.3 -1.2
100 14,421 14,765 15,026 1,442 1,476 1,503
-19.6 -19.1 -18 -12.4 -11.5 -10.5
500 10,719 11,405 13,128 5,359 5,702 6,564
-14.6 -14.7 -15.7 -46 -44.4 -46
1,000 4,299 5,081 5,612 4,299 5,081 5,612
-5.9 -6.6 -6.7 -36.9 -39.6 -39.3
Total 73,517 77,330 83,579 11,648 12,829 14,289
Note: Figures in parentheses represent share in total volume/value.
Fake Currency, How It Enters India And What Are We
Doing To Take It Down

For a cash-based economy like India's, fake currency notes are

nothing short of hemlock.
The circulation of these fake notes in India is an open secret but
over the years, this menace has increased to this level that
government is mulling to change the design of the notes in
circulation currently
In a meeting held last month, the RBI Central Board
recommended designs for new banknotes series to the
government. The reason for proposing the new series is that
since India is still a cash based economy, the flow of fake
currency notes in economy continue to be huge problem.
One can fathom of extent of the problem that each year Fake
Indian Currency Notes (FICN) with face value of Rs 70 crore enter
Indian Economy but only one-third get intercepted

How Colossal is the problem?

One can imagine how big this menace is fake currency is that
according to the study conducted by Indian Statistical Institute
(ISI), as many as 250 out of every 10 lakh currency notes are
fake.
According to the study at any given point of time, banknotes with
a face value of Rs 400 crore are in circulation in the country. The
study also reveals that FCIN with face value of Rs 70 crore enter
Indian economy but Indian agencies only manage to intercept one
third of the amount.
The study also reveals that the fake 1000 rupee notes constitutes
nearly 50% of the total values of the fake notes. The fake notes of
100 and 500 rupee are also in circulation but the ratio of their
detection is slightly higher.

How does fake currency find its way in

India
According to the reports of Intelligence Bureau and RAW,
Pakistan's Military spy agency and their infamous Inter-Service
Intelligence (ISI) have been reaping an annual profit of Rs 500
crore by circulating counterfeit currency notes in India.
According to the notes, ISI has been making a profit of 30 to 40 %
on the face value of each Indian currency note produced in
Pakistan. According to reports, the cost of printing a Rs 1,000
counterfeit note, for instance, is Rs 39 (the RBI spends Rs 29 to
print a Rs 1,000 note), but it is sold at Rs 350-400. The total fake
notes that came into India in 2010 from abroad was pegged at Rs
1,600 crore, and going by this estimate, the report put the ISI’s
total profit at Rs 500 crore.
Once printed, Pakistan agencies use porous border of Nepal and
Bangladesh to smuggle to fake notes into India.