New currency circulation likely to reach 89% by Feb end: SBI

New currency circulation likely to reach 89% by Feb end: SBI  Circulation of new currency in the economy is likely to touch 79-89 percent of extinguished currency by the end of February, says a report by the Economic Research Department of State Bank of India   (SBI). The government had announced on November 8 that old Rs 500 and Rs 1000 notes would no longer be legal tender.

"Though the process of demonetisation has been completed on December 30, there are two issues that are important in the aftermath. First, when the things will return to normalcy. Second, how the recent deep rate cut will spur credit demand,” said Soumya Kanti Ghosh, Chief Economic Adviser & GM, Economic Research Department, SBI. On the issue of normalisation, the latest RBI data shows 44 percent of the demonetised currency has been replaced as at the end of December (vis-à-vis earlier estimate at 53 percent). In the report, Ghosh says one possible reason for this could be that the Reserve Bank of India (RBI) is also printing notes of small denominations apart from Rs 500. Assuming RBI continues to print, then by end-January 67 percent of the currency should get replaced (vis-à-vis earlier estimate at 75 percent). At this rate, by February end RBI could print as much as 80-89 percent of the total currency. Ghosh says either way, contrary to market perception, things will be closer to normal by February end as opposed to predictions of the crisis lasting longer. If this be the case, he notes the possibility of GDP bouncing back faster than anticipated is not ruled out. The research notes a lower growth this year will give the government significant leeway in planning the Budget for FY18 (a higher nominal GDP growth will allow much leeway in deficit projections). On the flip side, Ghosh notes demonetisation has pushed credit growth to historic lows. "Empirical evidence suggests when RBI reduced repo rate 125 bps during January 2015 till March 2016 and banks by 70 bps to customer, there was a substantial increase in credit to housing to the tune of nearly Rs 1.5 lakh crores. With rate cuts now being 90 bps at one go, clearly the evidence is strong for a credit growth rebound at least in the housing sector," he said. Going forward, the report says RBI may not oblige with a rate cut in February as global uncertainties may again play spoilsport. However, it says inflation trajectory is expected to remain significantly benign with CPI inflation likely at sub-4 percent untill February 2017. Hence, Ghosh notes in the report, the scope for accommodative monetary cycle will continue even in FY18.