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How Long will Cash Crunch Last?

It has been more than a month since government demonetized old currency notes of denomination 500 and 1,000. Nonetheless, people are still lingering with the resulting cash crunch. Government has asked people to bear the pain for 50 days but the prevailing situation has left everyone wondering whether cash crunch will end soon or not. One can get a good idea about how long the cash crunch will last by making an estimate in the following manner.

Total cash circulating On November 10, 2016, i.e. soon after the demonetization of 500 and 1000 rupee notes, total cash circulating in the economy had a value Rs. 15.4 trillion. Out of this value Rs. 2.9 trillion was present in the form of notes of small denominations. During the 40-day period, November 10, 2016 to December 19, 2016, the total currency in new notes released by the Reserve Bank of India (RBI) was Rs. 5.9 trillion. This implies that the value of total currency in circulation on December 19, 2016 was Rs. 8.8 trillion. Of this Rs. 5.9 trillion, RBI already had Rs. 3.9 trillion in new notes mainly of Rs. 2,000 denomination (probably 1.7 billion Rs. 2,000 notes having a value of Rs. 3.4 trillion) before demonetization. The rest 0.5 trillion was mostly in Rs. 100 and a few Rs. 500 denominations. Thus RBI must have printed new notes of value Rs. 2 trillion of mainly Rs. 500 denomination during the 40-day period. This means that RBI has printed new notes of value Rs. 50 billion per day which adds up to Rs. 2 trillion in 40 days. If one assumes that all this currency was in Rs. 500 denomination then it means that they have printed 100 million discrete notes per day.

With the help of information available above, we can find out how long it will take to remonetize the Indian economy. Prior to November 9, 2016 the value of total currency in circulation was Rs. 18.4 trillion. Indian government has already declared that they will not print the entire value. Thus let us guess that they will only print notes such that value of currency of the remonetized economy will be only Rs. 15.9 trillion and not Rs. 18.4 trillion. Thus RBI will have to print only (Rs. 15.9 trillion – Rs. 5.9 trillion –Rs. 2.9 trillion) Rs. 7 trillion.

We now have all the information needed to estimate the rate of remonetisation. The value of the currency that will circulate by December 31, 2016 will probably be (Rs. 8.8 trillion on December 19, 2016 + [December 31- December 19, 2016] x Rs. 100 million x Rs. 500) Rs. 9.4 trillion. Thus on December 31, 2016 the value of the currency would be about 50 % of what it was before demonetisation i.e., Rs. 18.4 trillion. So at least half of the remonetisation goal might be acheived by the government till the end of 2016.

To calculate further, lets assume that RBI will continue to print 100 million discrete notes of Rs. 500 denomination per day. With the help of this assumption, we can find out monthly increase of currency in circulation after December 31, 2016.

On the last day of January 2017, the value of the currency in circulation will be Rs. 10.95 trillion, relative to Rs. 18.4 trillion in % terms will be 59.5 %. By the end of February 2017, the value of the currency in circulation will be Rs. 12.35 trillion, relative to Rs. 18.4 trillion. In terms of %age, it will be 67.1 %. On March 31, 2017 the value of the currency in circulation will reach Rs. 13.9 trillion compared to Rs. 18.4 trillion i.e., 75.5% in terms of percentage. So, three fourth of the demonetised currency will probably be back into the system by the end of March.

This simple calculation suggests that the effect of crunch fading away can be felt after December 31, 2016 and will gradually fade away completely in a matter of 2–3 months after that. However, there are several variables which can come into play here and affect the process. So this calculation gives a rough idea about how long you may have to struggle with shortage of cash.

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