In November 2016, the Modi-led Government called for the demonetisation of high-value currencies, more than 80% of physical currencies in circulation. The demonetisation was carried out by the Government primarily to counter black money hoarding in households, and immediately, banks across the country were flushed with deposits. This prompted banks across the country to increase the interest rate for savings account deposits, however, with banks of late reducing the interest rate, the effect has been a recoil.
According to the Reserve Bank of India, despite the demonetisation by the Government, household savings has increased to 2.8% of the national income, the highest in a decade. Subsequently, savings in corporate and bank deposits have decreased to a decade low at 2.9% of the national income. Though hoarding of physical currencies is at its highest in 10 years, according the Reserve Bank of India, the currency in circulation is at Rs.19.38 lakh crore, which is higher prior to demonetisation.
As per the statement of the RBI that was reported by Economic Times, the drop in interest rates offered by banks across the country has prompted citizens to hoard physical currencies at home, rather than deposit it in banks. That said, based on the report, household cash savings are even higher that the amount of money that is currently parked in stocks, pension and provident fund schemes.
However, while the country has yet again decided to save their money in their closets rather than at banks, according to the RBI, the GDP ratio of the country has increased to 10.9% as of FY 2017-2018, and is the highest amongst emerging market economies across the globe.
Source: Economic Times