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Cash deals waning, digital payments making rapid rise, shows RBI paper

Cash is on the wane in India and digital payments is on the rise, the Reserve Bank of India’s Occasional Research paper shows.

The paper, Cash versus Digital Payment Transactions in India: Decoding the Currency Demand Paradox, said that while the sustained growth in currency demand is influenced by the precautionary and store-of-value motives, the use of cash as a medium of payment continues to fall.

“This is indicative of the growing substitution of cash by digital payments for transactional purposes,” it said.

The paper showed that the transactional use of cash is showing signs of a decline, while the precautionary and store-of-value motives significantly influence the demand for currency in circulation (CiC).

“This is evident from the growing share of large-denomination banknotes contrasted with muted growth in small-value notes and coins; subdued cash withdrawals; diminishing cash velocity and a shift towards digital modes for effecting small-value retail transactions,” the paper said.Alternatively, the paper showed that the potential of both cash and

digital payments are set to rise in a growing economy like India.

“Due to increased transactional activity, it also underscores the significance of precautionary variables in determining cash demand. Overall, however, the ongoing rapid growth momentum in digital payments has the potential to moderate the positive income effect on currency demand,” the paper said.

Digital payments and currency circulation

Latest data available with the apex bank showed that the RBI digital payment index (RBI-DPI) stood at 395.57 in March 2023 against 377.46 in September 2022 and 349.30 in March 2022. The central bank said on July 27 that the RBI-DPI index has increased across all parameters driven by significant growth in payment infrastructure and payment performance across the country over the period.

Among digital payments, mobile payments platform unified payments interface (UPI) has seen a significant growth of a whopping 11.4 billion (1,140 crore) transactions, setting a new record with the value surpassing Rs 17.6 lakh crore in October 2023.

For CiC, the RBI bulletin for October 2023 showed that growth in CiC declined to 4.3 percent from 7.7 percent a year ago, reflecting the withdrawal of the Rs 2,000 currency notes.The bulletin also said that the money supply (M3) grew by 11.0 percent on-year as against 7.8 percent a year ago (excluding the impact of the merger of HDFC with HDFC Bank with effect from July 1, 2023).