Currency in circulation remains unchanged during Diwali week: SBI Research

The currency in circulation stood at Rs 43,900 cr during the Diwali week in 2021, more or less stagnant compared to the Rs 43,800 cr in the year ago period

The currency in circulation (CIC) remained constant during the Diwali week this year despite the record purchases, showing that payments through digital mode accelerated, SBI said. Within digital payments, it is UPI which is gaining currency and it can be used for real time policy making, it advised.

"Latest currency in circulation data reveals that it has remained constant over the previous year even as record purchases happened during Diwali at Rs 1.25 trillion. This happened for the first time since 2014," SBI group Chief Economic Advisor Soumya Kanti Ghosh said.

The currency in circulation stood at Rs 43,900 crore during the Diwali week in 2021, more or less stagnant compared to the Rs 43,800 crore in the year ago period, the study showed.

Within digital mode, Indian consumers have now migrated big time to better technology platforms like UPI that do not require the intervention of a POS machine and factor authentication, the study said.

As many as 3.5 billion transactions worth Rs 6.3 trillion were recorded through UPI in the month of October 2021, representing a jump of 100 per cent in the volume of transactions and nearly 103 per cent in their value year-on-year.

UPI transactions have jumped 69 times since 2017, while debit card transactions have commensurately stagnated indicating people's preference and shift to UPI mode

"Indian consumers now prefer convenience in payments through the click of a button. The vast quantity of information that is produced as a passive by-product of the use of such UPI transactions holds a great promise as a transformative resource for real time policy and evidence based policy making," the study said.

It said as convenience in payments takes centrestage, the future will evolve increasingly towards the use of huge swathes of data through the use of artificial intelligence and machine learning by banks to redefine financial intermediation and this will imply further scaling up of large investment in cloud platforms.

This might also necessitate regulatory interventions by both the central bank and the government, so that databases can be harnessed and stored and also used for real time policy making.

After dipping to 8.7 per cent of GDP post demonetisation, the currency in circulation (CIC) as a percentage of GDP has climbed again. However, this could partly be due to contraction of GDP by 7.3 per cent during FY21. The effect is also evident in GDP in the current financial year.

If the circumstances were normal, nominal GDP growth in FY21 and FY22 would have been much higher and if the effect of pandemic on holding of currency is not taken into account, the CIC as per cent of GDP would have been much less.

"We estimate that without pandemic GDP collapse, CIC/GDP ratio would have been at 12.7 per cent as against 12.4 per cent in FY11," Ghosh said.

He said his estimate also shows that because of the pandemic people may have been holding as much as Rs 3.3 trillion in cash as a precautionary measure, implying currency as proportion to GDP may have actually declined in recent times.

Meanwhile, the tax to GDP ratio jumped from 10.5 per cent in FY16 to 11 per cent in FY19 and has retreated since then as the exemption limit was raised to Rs 500,000 in the FY20 Budget.

"But critics miss such tax changes and ascribe a declining tax/GDP ratio beyond FY19 as an example of less formalisation," SBI Research said.