Cash is still king, with currency in circulation touching a new high in October

Cash is still king. Six years after demonetisation, the currency in circulation has jumped to a new high of Rs 30.89 lakh crore as of October 21, 2022, reflecting that cash still remains the preferred choice of payment for Indians. Compared with the pre-demonetisation period, it has increased by a massive 72 per cent from Rs 17 lakh crore on November 4, 2016. The demonetisation (of Rs 500 and Rs 1,000 notes that ceased to be legal tender) was announced by Prime Minister Narendra Modi on November 8, 2016, with the aim of reducing the circulation of black money in the economy, among other objectives.

However, while comparing absolute numbers, it is important to compare them with the GDP, as it is the key indicator of measuring cash in the system in tune with economic growth. A back-of-the-envelope calculation shows that at present, currency in circulation is at 13 per cent of GDP compared to 14 per cent last year. The figure was 13 per cent in 2020 as the Reserve Bank of India (RBI) had infused liquidity into the system after the outbreak of the Covid-19 pandemic. Incidentally, the cash in circulation as a percentage of GDP was at 12 per cent in 2016.

While the cash in circulation has gone up, digital payments have also been on the rise. According to data from the banking regulator, the RBI-Digital Payments Index, which tracks digital payments, rose 29.08 per cent to hit an all-time high of 349.3 points in March 2022 from 270.59 points a year ago.

“In the total payments system, we have defined digital transactions as the transactions in IMPS (Immediate Payment Service), UPI (Unified Payments Interface), and PPI (Prepaid Payment Instruments); [and] cash transactions as CIC [cash in circulation]. 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 by FY27. Consequently, the share of digital transactions 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 by FY27,” says Soumya Kanti Ghosh, Group Chief Economic Advisor of State Bank of India, in a research report called “The power of digital transactions”. While cash is still king, digital is catching up.

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