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30 Nov 2020

#Demonetisation – Sorry Folks, Data Shows No Leak of Information for Deposit Growth

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Demonetisation opponents and conspiracy theorists are trying to imply that a surge in bank deposits in the August to September 2016 period indicates that the move was leaked to a few who took advantage of the information to convert black money to white by depositing the money in banks.

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Arjun Parthasarathy

Demonetisation opponents and conspiracy theorists are trying to imply that a surge in bank deposits in the August to September 2016 period indicates that the move was leaked to a few who took advantage of the information to convert black money to white by depositing the money in banks. Bank deposits rose by Rs 3.83 trillion in the period from 5th August to 30th September with deposits touching all time highs of Rs 100.01 trillion on 30th September. Chart 1

How does the banking system get deposits? Demonetisation has shown that when people deposit cash into accounts, deposits grow and in the 8th November to 18th November period, people deposited Rs 5.4 trillion of cash into bank accounts. This figure will reflect a fall in currency in circulation to that extent.

In the August to September period, currency in circulation grew by Rs 500 billion, and the deposits certainly did not come from black money being converted into white. Chart 3

In August, the government cash balances fell sharply despite receiving a dividend of Rs 658 billion from RBI. The government released 7th pay commission arrears to its employees for around Rs 450 billion and was also spending heavily. The government was in fact drawing overdraft from RBI WMA (Ways and Means Advances) of Rs 450 billion to spend. Government spending goes straight into the banking system.  Chart 2

Banks when they give credit, creates more deposits, which is the money multiplier factor. Banks have also shown growth in lending in the August-September 2016 period, and this leads to creation of deposits. Chart 1

Corporate India parks surplus cash with mutual funds as am alternative to bank deposits. Mutual funds typically see large scale shift from their liquid funds to bank deposits as banks offer higher rates to corporates to shore up deposit base for the half year end in September. This shift too has accounted for the rise in bank deposits.

All Scheduled Banks Deposits and Credit (Rs billlion)

Govt Cash Balances with RBI (In Rs billion)

Currency in circulation -Total (Rs billion)

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