Introduction On November 8, 2016, currency notes of denominations of `1000 and `500 (specified bank notes or SBNs) valued at `15.4 trillion and constituting 86.9 per cent of the value of total notes in circulation, were demonetized. Demonetization led to several changes for the financial sector which can be summarized below.
There has been a significant shift in the income elasticity of currency demand in the post-demonetization period to 0.9 from more than 1 in the pre-demonetization period, reflecting a reduction in cash intensity in retail transactions.
The ‘excess’ low-cost bank deposit growth, a mirror image of the decline in currency in circulation (CIC), following demonetization has been estimated in the range of 3.0-4.7 percentage points.
Since demonetization, 50 million new accounts were opened under Pradhan Mantri Jan Dhan Yojana (PMJDY) by October 2017.
The amount of unusual cash deposits in special types of accounts (such as the Basic Saving Bank Deposit, PMJDY, Kisaan Credit Card (KCC), loan accounts and the like) is estimated in the range of `1.6-1.7 trillion.
In an environment of a surge in low-cost current account and saving account (CASA) deposits, banks announced a large cut in their marginal cost of funds based lending rates (MCLR) with a 100 basis points (bps) reduction in the 1-year MCLR.
A sizeable expansion in the collections of debt/income-oriented mutual funds occurred after demonetization i.e., during November 2016 to March 2017. The assets under management (AUM) by mutual funds increased from about `16 trillion to `21 trillion between end-October 2016 and end-October 2017.
The cumulative insurance premium collections during November 2016 to January 2017 increased by 46 per cent over the same period of the previous year.
The latest data reveal that prepaid payment instrument (PPI) volumes increased by 54 per cent between November 2016 and August 2017, as also mirrored in the significant drop in the income elasticity of currency demand referred to earlier.
In the post demonetization period, the rate of detection of FICNs rose to 6 pieces and 12 pieces for `500 and `1000 notes, respectively, for every million pieces of notes processed - more than twice during the pre-demonetization period.