Currency in circulation declines in Diwali week for first time in 20 years: SBI Ecowrap

State Bank of India (SBI) in its report, Ecowrap, stated that the currency in circulation declined during the Diwali week for the first time in 20 years. The Ecowrap mentioned that this was due to the growth in digital transactions. The report stated that the Indian economy is undergoing a structural transformation.  

“In a remarkable development, for the first time in 20 years, currency in circulation declined during the Diwali week. The innovations in technology have changed the Indian payment system. Over the years, the Indian cash lead economy now has changed to smart-phone lead payment economy. A lower currency in circulation also is akin to a CRR cut for the banking system, as it results in less leakage of deposits and it will impact monetary transmission positively,” it added. 

The research report credited the government for its push to formalise and digitalise the economy. Interoperable payments such as UPI, wallets and PPIs have also made it simpler and cheaper to transfer money digitally, even for those without bank accounts, it said. Moreover, innovations such as QR code, NFC rapidly expanded the system, and big tech firms entered the industry. 

“If we look at the latest retail digital transactions data, NEFT holds a share of 55 per cent in value terms and most of the transactions are done either at branch or through internet banking. However, if we look only transactions done through smartphones like UPI, IMPS & e-wallet, they have a share of around 16 per cent, 12 per cent and 1 per cent respectively,” it said, further adding that small payments through UPI and e-wallets hold around 11-12 per cent in the payment industry. 

M-wallets are slower to catch up, but according to the RBI, it might be due to the rise in UPI payments. 

“In total payment system, we have defined digital transactions as the transactions in IMPS, UPI, and PPI; cash transactions as CIC. The trends are revealing, as the share of CIC in payment systems has been declining from 88 per cent in FY16 to 20 per cent in FY22 and is estimated to go down further to 11.15 per cent in FY27. Consequently, the digital transactions share is continuously increasing from 11.26 per cent in FY16 to 80.4 per cent in FY22 and is expected to touch 88 per cent in FY27,” it said. 

The Ecowrap stated that they carried out a Structural VAR model to find out the impact of UPI and prepaid payment instruments (PPI) on the currency in circulation (CIC), M0, M3, money multiplier (MM), and bank deposits.

It found the following:

1. Increase in PPI is negatively impacting CIC and M0 but positively affecting M3. UPI increase is negatively affecting M0 and M3 but has not significant impact on CIC. 
2. UPI and PPI increase will not significantly affect the money multiplier though the coefficients are negative. 
3. Every INR crore increase in UPI leads to decrease by 0.81 crore, 0.96 crore and 1.22 crores in M0, M3 and SCB deposits respectively.
4. Every INR crore increase in PPI leads to decrease by 1.52 crore, 3.28 crore, and 0.23 crore inn CIC, M0 and SCB deposits respectively. Every INR crore increase in PPI leads to an increase in M3 by 11.79 crore.

“The impact of the UPI transactions on monetary aggregates is revealing in terms of the structural VAR model. In case of CIC, it results in a decline in CIC for around 3 months than it wanes out after 4 months. In case of M0, it results in a decline in M0 for one month and starts waning out after 4 months,” said the report adding that it implies that RBI has to print less currency, which is a win-win for both the apex bank and the government as it saves seignorage costs and pushes for a cash-less economy. 

The increased usage of PPIs has the potential to impact the measure of monetary aggregates.

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