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First Time in 20 Years, Currency in Circulation Declines in a Busy Diwali Week: SBI
Moneylife Digital Team 03 November 2022
Economy & Nation
In a remarkable development, for the first time in 20 years, currency in circulation (CIC) declined during Diwali week. With the increased acceptance of digital payments in the country, over-reliance on cash is slowly fading away. Over the years, the Indian cash-led economy has now changed to a smart-phone led payment economy, says a research note.
 
In the report, Dr Soumya Kanti Ghosh, group chief economic adviser of State Bank of India (SBI), says, "A lower currency in circulation also is akin to a cash reserve ratio (CRR) cut for the banking system, as it results in less leakage of deposits and it will impact monetary transmission positively. The increasing usage of pre-paid instruments (PPIs, also a part of e-money) has the potential to impact the measure of monetary aggregates. For example, if a consumer prefers to use e-money or PPI in the case of India vis-à-vis currency, then for a given stock of currency, the money multiplier might decline."
 
With the increase in digital transactions, this is the first time after 2002 that currency in circulation during the Diwali week shows a decline, assuming that the marginal decrease in 2009 was purely because of economic slowdown, SBI says.
 
 
According to the report, the success of the digital journey is primarily due to the relentless push by the government to formalise and digitalise the economy. "Further, interoperable payments systems like unified payments interface (UPI), wallets and PPIs have made it simple and cheaper to transfer money digitally, even for those who do not have bank accounts. 
 
"Over the years, the system has expanded rapidly with new innovations like QR code, and near field communication (NFC) and has also seen the swift entry of big tech firms in this industry.   
 
"If we look at the latest retail digital transactions data, national electronic funds transfer (NEFT) holds a share of 55% in value terms and most of the transactions are done either at a branch or through internet banking. However, if we look only at transactions done through smart phones like UPI, immediate payment service (IMPS) and e-wallet, they have share of around 16%, 12% and 1% respectively. So, the small retail payments done through UPI or e-wallets hold around 11%-12% in the payment industry," SBI points out.  
 
 
The slow pace of m-wallets may be due to the rise in UPI payments August 2016 onwards reaching Rs12 lakh crore in October 2022, capturing the market very quickly.
 
In the total payment system, SBI defined digital transactions as the transactions in IMPS, UPI, and PPI and cash transactions as CIC. It says, "The trends are revealing, as the share of CIC in payment systems has been declining from 88% in FY15-16 to 20% in FY21-22 and is estimated to go down further to 11.15% in FY26-27. Consequently, the digital transactions share is continuously increasing to 80.4% in FY21-22 from 11.26% in FY15-16 and is expected to touch 88% in FY26-27."
 
To test the result of UPI transactions on currency in circulation empirically, SBI carried out a structural vector autoregression (SVAR) model to find out the impact of UPI and PPI on the CIC, monetary base (M0), the broad concept of money supply (M3), money multiplier (MM), and bank deposits, individually, with short-run constraints. M3 or broad money is defined as the total stock of money, including paper notes, coins and demand deposits of banks, in circulation, which is held by the public at any particular point of time.
 
As expected, SBI says, the results reveal that the increase in PPI is negatively impacting the CIC and M0. Further, an increase in PPI is positively affecting the M3. An increase in UPI is negatively affecting the M0 and M3 but it has no significant impact on CIC. It also found that increases in UPI and PPI are not significantly affecting the money multiplier, though the coefficients are negative. 
 
"It has been estimated that every Rs1 crore increase in UPI leads to a decrease in M0, M3 and SCB deposits by Rs0.81 crore, Rs0.96 crore and Rs1.22 crores, respectively. Further, every Rs1 crore increase in PPI leads to a decrease in CIC, M0, and SCB deposits by Rs1.52 crore, Rs3.28 crore, and Rs0.23 crore, respectively. Every Rs1 crore increase in PPI leads to an increase in M3 by Rs11.79 crore," SBI says.
 
Interestingly, the impact of the UPI transactions on monetary aggregates is revealing in terms of the structural VAR model. In the case of CIC, it results in a decline in CIC for around three months; then it wanes out after four months. In the case of M0, it results in a decline in M0 for one month and starts waning out after four months. 
 
"In simple terms, it implies that the Reserve Bank of India (RBI) has to print less of currency given that UPI transactions impact currency in circulation with a lag. This is a win-win for both RBI and the government, as it results in saving of seignorage (difference between the value of money and the cost to produce and distribute it) costs and also a less cash economy. This will also mean all the analysis of currency leakage impacting bank deposits, liquidity estimation now could see a fundamental reorientation in the future!" SBI says.
Comments
milindnadkarni
2 years ago
In my humble opinion, more than a conscious effort from RBI and Govt, it is the circumstances created by pandemic (during 2020 & 2021), which pushed many citizens across strata of society, to adopt cashless means of payment at least in low value transactions. Coupled with this sort of "forced" push from pandemic, there were other factors too : service providers (like Whatsapp & Google) making the apps used in these cashless transactions, user friendly, robust, increased usage of mobile (in data mode) coupled with stability of 4G network, in rural & semi urban pockets.
Reply
k p Indrasimhan
Replied to milindnadkarni comment 2 years ago
Hello, Are you the Milind Nadkarni who was a student at the American Embassy School, New Delhi?
Reply
pc_patel
2 years ago
Indeed, this is great achievement and we are better position than other countries on account of these success.Well done RBI & govt.
Reply
S.SuchindranathAiyer
2 years ago
What happened 20 years ago to crush the economy?
Reply
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