Currency in circulation nears a trillion rupees prompting steps to absorb part of it

Currency in circulation has gradually reached almost a  trillion rupees by mid-August, in response to the extraordinary support extended by the monetary policy by way of liquidity made available and the fast descent in the interest rates since the onset of the pandemic last year. 

According to the latest data made available by the Central Bank, the currency held by the public by August 18 was at Rs.967.6 billion, which is a marked increase of Rs.133 billion since the end of 2020 and Rs.289.6 billion from the end of 2019. 

There was a massive increase in the currency in circulation from the end of February 2020 through December 2020, measured at Rs.151 billion, during which time the Central Bank was forced to resort to provide assistance to the public by way of cash transfers to those who lost their daily incomes, maintain adequate liquidity in money markets to ensure the banks and other firms have access to liquidity when their cash flows came to an abrupt halt. 
The Central Bank also helped the government to fight against the virus while sustaining its day-to-day activities, including the payment of salaries to over 1.6 million public servants.

All this helped to mitigate the immediate adverse effects of the pandemic to the public and the broader economy while helping the recovery. 

“The Central Bank was compelled to do the heavy lifting of the pandemic response, given the lack of fiscal space,” the Central Bank said listing down its estimated direct benefits to the economy from tits monetary easing measures since the onset of the pandemic. 

However, as the excesses started emerging by way of imbalances in the external sector and price pressures, which increasingly appear to be more persistent than transitory, the Central Bank last week decided to roll back part of its extraordinary monetary policy support and thereby absorb part of this massive currency stock pile back into the banking system. 

The Central Bank last week raised its key policy rates by 50 basis points while increasingly the banks’ statutory reserves ratio by 200 basis points, effective September 1, enabling it to draw part of the money in circulation back into the banking system by way of deposits.

“The upward adjustments in market interest rates and the expected liquidity deficit in the domestic money market would also help the economy to absorb the large amount of currency held by the public observed since the onset of the pandemic in early 2020,” the Central Bank said. 

Last year’s slashing of the banks’ reserve ratio released Rs.180 billion worth of liquidity into the market, the data showed. 

And with the reverse happening this year in respect of the reserve ratio, resulting in the drain of liquidity from the banking system back into the Central Bank, the banks could ramp up their efforts in advertising for deposits, drawing part of the money in circulation back into them.