Demonetization: Currency in circulation rises by 83% since demonetization in 2016

The country’s currency in circulation (CIC), which has increased by roughly 83 percent after the announcement on November 8, 2016, has increased despite the demonetization of the high-value notes of Rs. 500 and Rs. 1,000. On Monday, the Supreme Court backed the government’s decision to implement demonetization. One of the main goals of the historic decision, which was announced by Prime Minister Narendra Modi on November 8, 2016, was to encourage digital payments and stop the flow of illegal money.

The CIC, measured in value terms, increased from Rs 17.74 lakh crore on November 4, 2016, to Rs 32.42 lakh crore on December 23, 2022, according to Reserve Bank data. The CIC, on the other hand, abruptly dropped to a low of approximately Rs 9 lakh crore on January 6, 2017, which is roughly 50% of Rs 17.74 lakh crore on November 4, 2016, just after the introduction of the new currency.

Following the destruction of outdated 500/1,000 bank notes, which at the time made up about 86% of all notes, this was the lowest in the previous six years. The CIC has increased by more than three times, or 260%, when compared to January 6, 2017, while it has increased by roughly 83.0% when compared to November 4, 2016.

Week by week, CIC increased as remonetization picked up speed, reaching 74.3 percent of its peak by the conclusion of the financial year. At the end of June 2017, it was then about 85% of its pre-demonetization peak.

Approximately Rs 8,99,700 crore less CIC as a result of demonetization (up to January 6, 2017) resulted in a significant surge in excess liquidity in the banking system, which is comparable to a reduction of nearly 9% in the Cash Reserve Ratio (percentage of deposits parked with the RBI).

As a result, the Reserve Bank’s liquidity management operations were put to the test. To address this, the central bank deployed instruments, particularly reverse repo auctions under the liquidity adjustment facility (LAF) window. CIC increased from Rs 31.33 lakh crore at the end of March 31, 2022, to Rs 32.42 lakh crore at the end of December 23, 2022.

With the exception of the year of demonetization, CIC has increased since. From Rs 16.42 lakh crore at the end of March 31, 2015, CIC decreased by 20.18% to Rs 13.10 lakh crore at the end of March 2016. It increased by 37.67% to Rs 18.03 lakh crore the year after demonetization, by 17.03% to Rs 21.10 lakh crore by the end of March 2019, and by 14.69% to Rs 24.20 lakh crore at the end of 2020.

The rate of CIC growth in value terms over the preceding two years was 9.86% to Rs 31.05 lakh crore at the end of March 31, 2022, and 16.77% to Rs 28.26 lakh crore at the end of March 31, 2021. In a 4:1 majority ruling, the Supreme Court upheld the government’s 2016 decision to demonetize the Rs 1,000 and Rs 500 denomination notes, holding that the decision-making process was not defective. A five-judge Constitution bench of the Supreme Court led by Justice S. A. Nazeer stated that extreme restraint must be used while making decisions regarding economic policy and that the court cannot take the place of the executive’s judgment by judicially reviewing it.

Regarding the authority granted to the Center under section 26(2) of the RBI Act, Justice B V Nagarathna disagreed with the majority verdict and argued that legislation, not a notification, was required to abolish the Rs. 500 and Rs. 1,000 series notes.