High inflation coupled with low bank deposit rates saw currency holding in financial savings of the household sector rise significantly in 2010-11, according to the Reserve Bank of India's Annual Report 2010-11.
The gross financial savings increased to Rs 10,43,977 crore from Rs 9,91,582 crore in 2009-10. Of this, the share of currency increased substantially to Rs 1,39,344 crore, from Rs 96,940 crore, an increase of Rs 42,404 crore.
As against this, the share of deposits increased to Rs 4,93,237 crore (Rs 4,67,575 crore), a rise of Rs 25,662 crore. According to the report, several factors could explain the growth in currency demand in India in 2010-11. Inflation remained high, often in double digits, in respect of commodities such as foodgrains, pulses, fruits and milk during 2009-10 and 2010-11 where transactions are expected to be cash-intensive.
Second, there was a step-up in real economic activity from 6.8 per cent in 2008-09 to 8.5 per cent in 2010-11. Third, the interest rate on bank deposits was generally lower than inflation during 2010-11 implying a negative real rate of return on deposits.
In the years when inflation was relatively high, currency demand shot up significantly.
However, the situation has reversed in 2011-12. Currency demand has come down because deposit rates have gone up, said Mr Deepak Mohanty, Executive Director, RBI.
The share of households' financial assets to GDP fell to 9.7 per cent in 2010-11, from 12.1 per cent in 2009-10. This is the first time in 15 years that the share of households' financial assets to GDP fell below 10 per cent.
Due to high inflation people dipped into savings for consumption. This was evident from redemptions in mutual funds, Dr Gokarn explained.