India’s Money Supply Surge Signals Pandemic Uncertainty, Not Growth

MUMBAI (Reuters) – Heightened uncertainty in India caused by the coronavirus pandemic has led to an increase in currency in circulation as people hoard money or put money in accessible deposits to protect themselves against pay cuts or job losses.

FILE PHOTO: An Indian rupee note is seen in this June 1, 2017 illustration photo. REUTERS/Thomas White/Illustration

According to RBI data, India’s M3 money supply grew by 6.7% in the first five months of this year compared to the same period last year, the fastest growth in seven years.

Currency in circulation, which measures money with the public and in banks, also surged.

An increase in the money supply is generally seen as a leading indicator of growth in consumption and business investment, but this time around that increase is unlikely to get any stronger either, analysts said.

Chart: Increase in M3 money supply –

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

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

Graph: Gross capital formation –

“Risk-averse people are putting money into bank deposits, given the high and growing uncertainty, while on the other hand, risk-averse lenders are not lending to those in need,” he said. said Kunal Kumar Kundu, Indian economist at Societe Generale.

However, the growth of banknotes held by the public was much higher than that of deposits made in banks.

Since late March, currency held by the public has risen 8.2% against a 4.1% increase in time deposits, the data showed. Savings and deposits in current accounts decreased by 8% due to the increase in withdrawals.

Graph: Components of money supply –

“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 heightened uncertainty about how long the pandemic will last.”

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