 "Reserve Bank of India, RBI")
Digital payments are replacing the need for cash in everyday transactions, yet the enduring motive to hold cash as a store of value persists, according to a report released by the Reserve Bank of India (RBI). This is exemplified by the growth of currency in circulation (CiC), which is primarily fuelled by the demand for large-denomination banknotes showing a growing share within the total CiC, the report said.
“Overall, it is seen that digital payments are substituting the transactional demand for cash, but the store-of-value motive of holding cash remains intact. Illustratively, this is evident from the CiC growth being primarily driven by the demand for large-denomination banknotes, which have witnessed an increase in their proportion of total CiC,” the report said.
According to the report, the circulation of large-value notes has witnessed a significant surge, particularly during the pandemic. In 2020-21, there was a growth of 19.4 per cent, followed by an 11.3 per cent increase in 2021-22. The value of low-denomination notes, however, has remained relatively stable. Analysing the weekly change in CiC between April 2018 and March 2022 as a proxy for transactional cash usage reveals that 42 per cent of the change in CiC can be attributed to transactional motives.
Moreover, there has been a notable rise in the proportion of high denomination notes in total circulation. The share of high denomination notes by volume increased from an average of 21 per cent in 2010-16 to 33.1 per cent in 2020-21, 36.5 per cent in 2021-22, and 44 per cent in 2022-23. In terms of value, large denomination notes accounted for 90 per cent share, marking an 8 percentage point increase from the 2010-16 average.
The report also said that the share of low denomination notes has declined as they have been at least partly substituted by UPI and mobile wallets for small-value payments, as evidenced by the narrowing ticket sizes, the report added. There is also a noticeable decrease in cash withdrawals from ATMs, indicating a diminishing need for cash in day-to-day transactions, the report said.
To catalyse the shift towards digitalisation, the RBI has implemented various initiatives. These include enabling the continuous operation of centralised payment systems, establishing a Payment Infrastructure Development Fund to facilitate the cost-effective deployment of payment acceptance infrastructure, introducing UPI123Pay to extend digital payment capabilities to feature phone users, promoting interoperability for prepaid payment instruments (PPI), and initiating pilot projects for retail and wholesale central bank digital currencies (CBDC). These measures collectively aim to boost the digital ecosystem and enhance financial inclusivity.
