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Currency-to-GDP ratio to reach 9 per cent by March end: Nomura

Money in circulation is rising again in India post demonetisation and at the current rate, currency-to-GDP ratio will reach about 9 per cent by March — sufficient to stabilise economic activity, says a report.

According to Japanese financial services major Nomura, from 11.8 per cent of GDP on November 4, 2016 (pre-demonetisation), currency in circulation dropped to all-time low of 5.9 per cent on January 6; since then, it has risen for two straight weeks to 6.5 per cent as of January 20.

“This suggests that remonetisation is progressing well, as deposits of old notes into banks (currency outflow) has stopped (the window to deposit old notes ended on December 30), while the Reserve Bank is printing new notes (currency inflow) for circulation,” Nomura said in a research note.

It believes that at the current pace, the currency-to-GDP ratio will rise to around 9 per cent by March end. “In our view, this will be sufficient to stabilise activity since some part of the earlier cash was hoarded and partly due to a larger digital footprint,” it added.

Nomura said the negative effects of demonetisation on growth are likely to be transitory as demand conditions are likely to re-surface after remonetisation and the economy is expected to see a V-shaped recovery.

“We expect the release of pent-up demand after remonetisation, wealth redistribution and lower lending rates to result in a V-shaped pick-up in both growth and inflation in the second half of 2017,” the report said.

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