Increase in money supply signals uncertainty during pandemic

The increased uncertainty caused by the COVID-19 pandemic has led to an increase in the circulation of currency, as people accumulate money or place money in accessible deposits to protect against wage cuts or job losses.

According to RBI data, M3 money supply grew 6.7% in the first five months compared to the same period last year, the strongest growth in seven years.

Currency in circulation, which measures money to the public and in banks, has also jumped.

An increase in the money supply is generally considered a leading indicator of growth in consumption and business investment, but the rise is unlikely this time around to strengthen either, analysts said.

“We suspect that the recent increase reflects higher cash withdrawals by depositors to meet needs during the lockdown period, until normalcy returns,” said Radhika Rao, economist at DBS Bank.

Gross capital formation, or total investment in fixed capital, fell 7% in the March quarter, a seven-year low, and analysts expect further deterioration. Lenders are also unwilling to take risks as slowing discretionary spending slows demand for manufactured and industrial goods.

“Risk averse individuals put money in bank deposits, given the high and growing uncertainty, while on the other hand, risk averse lenders do not lend to those who need it,” he said. said Kunal Kumar Kundu, Indian economist at Societe Generale.

However, the growth of banknotes held by the public has been far greater than that of deposits made in banks.

Since the end of March, currencies held by the public rose 8.2% against a 4.1% increase in term deposits, the data showed. Savings and current account deposits fell 8% due to an increase in withdrawals.

“At the margin, people have cut back on discretionary spending because they are unsure of their permanent income,” said Rupa Rege Nitsure, chief economist at L&T Financial Holdings. “There is still increased uncertainty about the duration of the pandemic. “

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