India faces yet another currency shortage but nobody seems to know what has caused this. Most explanations are in the realm of possibilities with little facts backing them.

While a host of reasons are being provided to explain the cash crunch, here are two factors that would have contributed very significantly to the shortage of currency.

First, banks say about a month back the RBI disallowed banks from transferring cash from one circle to another, a routine practice otherwise. As a result, banks were left with excess cash in some branches while other branches remained deficient in cash.

Second, and perhaps, the bigger reason was the 54 year low growth in bank deposits witnessed in financial year ending 2017-18. That left a gaping hole in the banking system that neither the government nor the RBI could anticipate.

Outstanding deposits in banks were at Rs 114.75 lakh crore on March 30, 2018, barely growing at 6.7 pc in the year-the lowest rate of growth in 5 decades-as against a very healthy 15.3 pc in 2016-17 and a 54 year average of 17.3 pc.

If the deposits had grown at the pace of the previous year, they could have given the banks an additional聽 Rs 9.28 lakh crore and if they had grown at the 54 year average, potentially 11.44 lakh crore. That's the kind of gap the banking system had to deal with as it entered the current financial year 2018-19 on April 1. It isn't clear whether the deposits slowed down closer to the financial year closing thereby triggering the shortage.

Since the currency requirement of banks is the difference between what the customers deposit in their banks accounts and what they withdraw. Banks indent that amount of currency from RBI's chests across the country. The lower the deposits, the higher the banks' demand for currency from RBI.

Lower customer deposits mean banks need that much more currency to meet withdrawal needs. Besides, demand for currency spiked by Rs 45,000 cr in the past 2 weeks as against the normal requirement of Rs 20,000 crore.

However, even though the RBI claims it holds currency reserves of Rs 1.75 lakh crore, supply of currency from the banking regulator has been in short supply for 3-4 weeks now. Banks have been writing to the regulator bringing it to its notice that their ATMs are running dry.

There are several other reasons being attributed to the currency shortfall, none of which is being blamed in entirety: a sudden spike in cash demand for Baisakhi, Ugadi and Bihu festivals; wage payments at the end of the harvest season; high demand for cash in poll-bound Karnataka; hoarding of Rs 2000 notes; stoppage of issuance/printing of the Rs 2000 notes as well as the fact that the banks are still to re-calibrate 20-25 pc of ATMs to accept and dispense the new Rs 200 note.

Interestingly, of Rs 6.7 lakh crore worth of Rs 2000 notes in circulation (out of the total Rs 18.43 lakh crore of current in circulation), nearly 25 per cent have not returned to the banking system and hence are believed to have been hoarded.

But the other explanations regarding high demand is festival season is far from convincing since India celebrates bigger festivals round the year. Also, higher cash withdrawals in Karnataka should have have at best affected Karnataka and the neighbouring states, not the entire nation, including Delhi/NCR and Mumbai.

But with banks being provided in a week what they need on a daily basis, this crisis it seems will get worse briefly before it gets any better.

Automated teller machines (ATMs) in more than five states–Uttar Pradesh, Bihar, Andhra Pradesh, Maharashtra and Karnataka–have run out of cash in many areas. The sudden spike in currency demand is variously attributed to upcoming state elections in Karnataka, cash payments in state government schemes in Telangana and Andhra Pradesh, misunderstanding of the Financial Resolution and Deposit Insurance Bill's 'bail-in' clause, which suggested that depositors bear a portion of any loss incurred by the bank. Cash withdrawals from ATMs hit a high of Rs 2.47 lakh crore in February 2018 compared to Rs 2 lakh crore in April 2015, RBI data show.

Monthly ATM cash withdrawals increased from Rs 2.17 lakh crore in April 2017, hit a high of Rs 2.64 lakh crore in December 2017 and declined to Rs 2.47 lakh crore in February 2018, when the cash shortage began to hit supplies.

Some reports (here and here) suggest that the RBI is not supplying Rs 2,000 notes to banks. So, ATMs are operating at half of their capacity. An ATM can hold Rs 65 lakh in four cassettes, of which one cassette has Rs 2,000 notes, two cassettes have Rs 500 notes and one has Rs 100 notes, The Economic Times reported on April 18, 2018. Bankers blamed RBI saying it was not supplying adequate cash despite banks demanding more currency, the report said. "The supply of cash from RBI to major State Bank of India (SBI) chests has drastically fallen since September 2017," according to an analysis for Telangana by Factly, a data journalism portal, based on reply by SBI to a right to information appeal by Rakesh Dubbudu, the portal's founder. "The average monthly supply in the five months between September 2017 and January 2018 is Rs 629 crore or one-third compared to the average monthly supply of Rs 1,795 crore between November 2016 and August 2017," Factly's analysis said. No new Rs 2,000 note was supplied by the RBI between April & November 2017 to SBI chests in the state, the analysis found. No Rs 500 notes were supplied either between October and December 2017. "During the 25 months for which data was provided, the supplies touched a peak of Rs 5,377 crore in July last year," The Hindu reported on April 11, 2018. "At the other end of the spectrum, the supply was nil in September 2016." Circulation is the bottleneck Currency in circulation–including the currency with the public and cash with banks–increased to Rs 18.3 lakh crore at the end of March 30, 2018, against Rs 13.8 lakh crore in April 2017.

Currency with the public also increased to Rs 17.5 lakh crore at the end of March 30, 2018, against Rs 13.2 lakh crore at the beginning of the financial year 2017-18. The government will print enough Rs 500 notes to bridge "perceived shortage" and provide for future demand, economic affairs secretary Subhash Garg was quoted as saying in this April 18, 2018, report by The Economic Times.

However, as we said, an SBI research team said that "income velocity"–ratio of GDP to money supply–based on currency with the public, went down from 0.93 in October to 0.84 in March. "This indicates that currency of higher denomination/Rs 2,000 is not getting adequately circulated in the economy," said the April 2018 SBI report, The (Non) Genuity Of Cash Crunch, we referred to earlier. Based on nominal gross domestic product (GDP) growth of 10.8% and 9.8% in the financial year 2016-17 and financial year 2017-18, currency with the public should have been Rs 19.4 lakh crore by March 2018, the report said. "However, currency with public is at Rs 17.5 lakh crore, which shows a gap of Rs 1.9 lakh crore. The increase in digital modes of payment compensates some part of the existing gap. The shift to digital modes could be at least Rs 1.2 lakh crore. The apparent shortfall thus could be around Rs 70,000 crore or even less."