The Reserve Bank of India headquarters in Mumbai. Photo: AFP/Indranil Mukherjee

The restrictions posed by the shutdown in India, to arrest the spread of the Covid-19 pandemic, along with the resulting economic uncertainties, have reportedly increased the hoarding of cash.

According to data released by the Reserve Bank of India, there is more currency in circulation in the first four months of this year than in the entire 2019.

The central bank report states that the currency in circulation amounted to 2.66 trillion rupees (US$35 billion) in comparison with the 2.40 trillion rupees ($31.77 billion) in the 2019 calendar year.

Currency in circulation refers to the amount of cash in the form of paper notes or coins which is physically used to conduct transactions between consumers and businesses.

Experts are puzzled because a spike in currency circulation generally happens if there is a rise in economic activity or during festival times. But this time it is happening when all economic activity has come to a standstill.

This points to the fact that people are withdrawing large amounts of cash to reduce their number of visits to nearby ATMs. Secondly, with deposit rates being frequently lowered, people are reluctant to deposit money in banks.

Experts claim there is also a decline in confidence in the banking system in the backdrop of the central bank’s moratoriums on Yes Bank and earlier the Punjab and Maharashtra Cooperative Bank.

On the other hand, banks are reluctant to lend and are parking their funds with the central bank. As of last Tuesday, there were 8.53 trillion rupees ($113 billion) in excess bank liquidity with the Reserve Bank, the Business Standard reported.

Companies don’t want to borrow because they don’t want to increase their debt when there is huge excess capacity lying unutilized. Such a scenario may push up the banking system’s liquidity even further.

Meanwhile, digital payments have also taken a hit after the lockdown was imposed on March 25. According to data released by the National Payments Corporation of India, the value of Immediate Payment Service (IMPS) transactions, the instant inter-bank electronic fund transfer service using credit and debit cards, nosedived after the shutdown of most businesses.

In April it fell to about 1.21 trillion rupees ($16 billion), from about 2.02 trillion rupees ($26.74 billion) in March. The transaction count was 122.5 million in April, as against 216.8 million in March.

In the pre-lockdown days in February, the payment service counter had seen about 2.15 trillion rupees ($28.46 billion) worth of value in 247.8 million transactions.

Similarly, transactions through the BHIM and Unified Payments System, where a customer can pay directly from a bank account to different merchants with a quick response code, fell 26.7% to 1.51 trillion rupees ($20 billion), from 2.06 trillion rupees ($27 billion) in March.

The number of transactions fell to 990 million in April from 1.25 billion in March. In comparison, February witnessed 1.33 billion transactions for a total volume of 2.23 trillion rupees ($29.5 billion).