Post 30 Nov 2016, How cash is being allocated district-wise in India? Central planning at its best..

Central banks have cleverly avoided the tag of a central planner but that is what they eventually do. Their interest rate decisions attract so much attention just because we see the power of one body controlling/managing interest rates and monetary flows like no other. But somehow they have managed to create the image of a benevolent government player which wants markets to function.

The last 2 months in India we have seen how eventually central banks are nothing but central planners. The way in which the entire currency show has been managed tells us once again that these things are really difficult to manage centrally. These were lessons which were understood by the central bank in the 1940s and 1970s but were somehow missed in 2016.

Anyways coming to the point, one just stumbled upon this few days old press release of Indian central bank. In this, central bank suddenly wakes up and says more cash needs to be distributed to rural areas:

On observing that bank notes, being supplied to rural areas, at present, are not commensurate with the requirements of rural population, some steps have already been initiated as indicated in the above circulars. With a view to ensure that at least 40% bank notes are supplied to rural areas and to mitigate the issue in a more enduring manner, the banks maintaining currency chests are advised to take the following steps, in continuation of the above.

Distribution Channels and Proportion of currency flow

i. Banks should advise their currency chests to step up issuance of fresh notes to rural branches of RRBs, DCCBs and commercial banks, White Label ATMs in rural areas and post offices in rural areas on priority basis which are considered main rural channels of distribution.

ii. As the rural requirements could vary from district to district depending on variations in the rural and urban mix of each district in terms of relative shares in CASA deposits and number of deposit accounts, to facilitate a need based approach in this regard a certain percentage of allocation has been assigned to each district as per Annex 1 depending on the rural and urban mix.

iii. Accordingly, all Chests operating in a district must issue bank notes to the above mentioned distribution channels in the indicated proportion. The indicated proportion may be maintained on weekly average basis at each chest level as it may be difficult to stick to the proportion on daily basis.

Do click on Annex 1 (an excel file) and you come across district wise data of Current and Time deposits (unhide columns). It also has this very useful data of rural sector deposits in each of the districts. (I would guess that the idea was not to share this whole data).

Based on calculations:

  • RBI has asked currency chests to distribute nearly 4535 crore of currency amidst rural areas of 667 districts.
  • 11 districts do not have rural area (like Mumbai, Chennai etc), so they get zero currency.
  • 203 districts get 10 crore of currency in their rural areas. This is the capped amount and no district gets more than Rs 10 crore. All districts having Share of rural CASA in district CASA equal to 34.9% and above gets 10 crores.
  • Rest are in the middle.

What is interesting and puzzling is the basis for allocation.

  • RBI seems to have used a formula which says 40/14* (Share of rural CASA in district CASA).
  • This means districts with rural CASA share of 34.9% -35.1% gets 10 crores from calculation.Rest are just caped at 10 crore as the calculation shows higher values.
  • What does 40/14 mean? I am sure there must be some logic to it which as usual remains unexplained by the central bank. Keep guessing.

Even if there is a logic to the magical 40/14, how does one go about distributing cash in this manner? This is hidden central planning coming out and at its best….

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