Modelling and Forecasting Currency Demand in India

RBI has released Occasional Papers-Vol. 41, No.1, 2020.

One of the papers is on currency demand is by Janak Raj, Indranil Bhattacharyya, Samir Ranjan Behera, Joice John and Bhimappa Arjun Talwar.

The paper uses an array of time series and econometric techniques to analyse and forecast currency demand in India. While the weekly forecasting model includes institutional and idiosyncratic factors to generate forecasts of currency in circulation which are crucial for efficient day-to-day liquidity management operations of the Reserve Bank, the monthly model incorporates both macroeconomic factors and technological innovations in the payment system to delineate the impact of digital payments on currency demand. The quarterly and annual models incorporate macroeconomic factors to understand the long-run determinants and short-run dynamics of currency demand. The key findings emerging from the study are: (i) currency in circulation shows weekly and monthly seasonality apart from exhibiting significant variations during festivals and elections; (ii) an increase in the number of digital (card) transactions dampens currency demand in the short-run; and (iii) the long-run income elasticity of currency in circulation is unity.

 

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