The currency shortage that was first reported in Andhra Pradesh and Telangana has now spread to several parts of the country, prompting government and the Reserve Bank of India (RBI) to swing into action.
News reports from various states, including Andhra Pradesh, Madhya Pradesh, Telengana, Maharashtra and Bihar, said that automated teller machines (ATMs) were facing a cash crunch.
The RBI said it had ramped up printing of notes despite having sufficient cash in its vaults and currency chests.
"As a matter of abundant precaution, RBI is also taking steps to move currency to areas which are witnessing unusually large cash withdrawals," the central bank said in a statement late on Tuesday.
But there is no official explanation for this sudden demand. Here are some reasons that may have caused the latest cash crunch in the states.
One probable reason could be that the cash is being routed to Karnataka where state elections are scheduled to take place on May 12. It has been a practice to hoard cash before any election to meet huge campaign expenses.
The reports suggested that shortage was triggered by some misunderstanding relating to the Financial Resolution and Deposit Insurance (FRDI) Bill, which had a 'bail in' clause where depositors would bear a portion of any losses if a bank goes bankrupt.
The government has clarified that the bail-in clause will not be used for public sector banks and bankers have urged members of the public against accelerated withdrawals from their savings bank accounts and deposits.
Cash withdrawals in India go up during the crop harvest season, which is usually during March to April, and then during the festival season in October.
Analysts say that concerns over the health of India's banking system has also led savers to withdraw cash.
India's banking system has been fraught with challenges including a surge in bad loans and a recent revelation of a $2-billion fraud at the country's second-largest state lender Punjab National Bank.