The Indian banking system is likely to get a permanent liquidity boost of Rs 1.7 lakh cr due to the demonetization of high-denomination bank notes, State Bank of India chief economic adviser said in a note to bank clients.
He said people were not making the large cash withdrawals that everyone expected them to after the government lifted restrictions on taking cash out. These curbs have been gradually eased this year and were lifted entirely on Mar 13.
Ghosh, however, stopped short of ascribing the phenomenon to the success of Narendra Modi government’s ‘cashless India’ vision.
“What could be the possible reasons? Are people now averse to cash withdrawals because of strict monitoring? Or, there is indeed a shift to digital transactions? We are indeed not sure,” said Ghosh.
Adjusted for weekly trends, the amount of cash withdrawn every week has been declining since the end of the cash exchange period in December (see chart on top).
In the first full week of January, a total of 528 bln (52,800 cr) was withdrawn, and since then, no other week has seen a similar level of withdrawal.
The first week of February saw 481 bln (Rs 48,100 cr) taken out, while that number fell to 474 bln in the first week of March (see chart).
“The decline in cash withdrawals is intriguing even as limits on withdrawals have been removed completely from March 13…with the implementation of ban on cash transactions of over Rs 2 lakh from April 1, further decline in cash withdrawals may be a possibility,” the note added.
SBI estimates that there would be a substantial increase in average bank deposit levels after demonetization, even if not all of it is because of demonetization.
It noted that the total deposits in the banking system is higher by 4.27 lakh cr as of Mar 17 compared with pre-demonetization levels. Some of this cash will go out, but some won’t, it said.
“While it may be difficult to ascribe a reason, our estimates indicate that there would be a permanent liquidity injection of least Rs 1.7 lakh crore / 1.1% of GDP post demonetization,” the bank said.
To this extent, it added, the formal sector of India’s economy has increased in size at the cost of the informal sector, which works outside the banking and taxation system.
“This data is a reflection of the extent of formalization of the economy post demonetization.”
However, despite the jump in deposits levels, banks have not increased lending activity at the same rate, SBI said.