Cash In Circulation Rises, Albeit Slower Than Usual
Despite a spectacular jump in digital payments, the love for cash among Indians fails to go away. Currency in circulation has continued to rise in recent weeks, with the festive season prompting more purchases and people holding on to cash in the pandemic. However, current data suggest that the increase in currency in circulation seems to be slowing down.
The growth in currency in circulation has fallen to 7.9% (₹2.14 lakh crore) in November 2021 as against 22.2% (over ₹5 lakh crore) growth in the same month year ago. However, more than five year after demonetisation, currency in circulation has rising steadily every year, with the currency in circulation to GDP ratio having now search to 14.5% in 2022-21 from 8.7% in 2016-17, as per data presented by the Finance Ministry in Parliament. Currency in circulation to GDP is now even higher than that in the pre-demonetization period.
Demand for currency depends upon several macroeconomic factors including economic growth and level of interest rate. Precautionary demand generated by the public during fiscal 2020-21 due to the covid-19 pandemic induced uncertainty is also an important factor in currency demand.
Digital payments in India have become popular with UPI- based payments registering a huge surge. According to National payments Corporation of India (NPCI), the value of monthly transactions through UPI has been around ₹77 lakh crore. In 2016-17, a total value of retail transactions on UPI was a mere ₹6,947 crore, retail transactions worth ₹49 lakh crore have taken place through UPI alone so far in 2021-2022. As a percentage of business payments, cash usage will go down and it is constantly going down. A lot of business payments are now moving into the digital space, we have seen that in Covid. Cash in circulation is a different metric and there are multiple reasons that cash stays in circulation.
However, to expect cash usage to completely go away is unlikely. Cash remains a major mode of transactions with about 15 crore people not have a bank account for over 90% of e-commerce transactions use each as payment mode in tier 4 cities compared to 50% in tier 1 cities. Cash continues to be the dominant medium of transactions in India across regions and income groups.