Currency Leakage

What is Currency Leakage?

• According to the RBI, currency with the public is arrived at after deducting cash
with banks from total currency in circulation. Currency in circulation refers to
the cash or currency within a country that is physically used to conduct
transactions between consumers and businesses. Outflow of money from the
banking system is known as Currency Leakage and represents currency with
public.
• Currency leakage impacts the money supply in the economy.
• Currency leakage means there is more money with the public and lesser deposits
in the bank thereby reducing the amount bank can lend out resulting in lower
money supply.
• Demand for currency with public generally follows a seasonal pattern as shown in
the chart below. Currency Leakage tends to increase in the festive season.

Source: RBI 13 January2020

 Currency Deposit Ratio

Source: RBI

• A ratio to understand currency leakage is currency to deposit ratio (CDR). The

CDR shows the amount of currency the public hold as a proportion of the total
deposit.
• It tells us how much public is holding as cash and not re depositing in banks.
Higher ratio means more cash is held by public.
• Currency Deposit ratio(CDR) = Currency with public ÷ Total deposits (Demand +
Time deposits)
• Over the last few years currency deposit ratio has been declining, reason being
the improvement in the banking system like electronic banking, credit cards etc.
• The above chart shows the Currency Deposit Ratio from November 2000 to
November 2019. We can observe that CDR has been in the range of 20% to
15.81%, except in December 2016 it dropped to 7.01% due to demonetization.
• An increase in the CDR leads to a decrease in money multiplier.
• An increase in the deposit rates will induce depositors to deposit more currency
into the bank, which would lead to fall in cash to aggregate deposit ratio. This
will in turn lead to a rise in Money Multiplier.
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