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Currency in circulation has continued to rise in recent weeks, with the festive season prompting more purchases and people holding on to cash in the pandemic. However, current data suggest that the increase in currency in circulation seems to be slowing down.
Currency in circulation in the country was at over ₹29.5 lakh crore as on November 26 this year, marking a 7.7 per cent increase from ₹27.4 lakh crore as on November 27, 2020.
This was a 4.5 per cent increase from the start of the fiscal year 2021-22 when the currency in circulation was at ₹28.2 lakh crore as on April 2, 2021. The increase in cash in circulation was sharper last fiscal when it increased by 12.9 per cent between April 3, 2020 (at ₹24.3 lakh crore) and November 26, 2020.
Currency in demand
“Demand for currency depends upon several macroeconomic factors including economic growth and level of interest rate. Precautionary demand generated by the public during fiscal 2020-21 due to the Covid-19 pandemic induced uncertainties is also an important factor in currency demand,” said Minister of State of Finance Pankaj Chaudhary in response to a question in Rajya Sabha on December 7 on whether currency in circulation touched 14.5 per cent of GDP last fiscal.
A combination of greater public demand for cash and a contraction in GDP has led to an increase in currency in circulation from 12 per cent during 2019-20 to 14.5 per cent in 2020-21, he said, adding that year on year growth in currency in circulation has decelerated sharply to 7.9 per cent as in November 2021 from pandemic influenced surge to 22.2 per cent a year ago.
According to a recent SBI Ecowrap, currency in circulation is expected to be lower at about 13.1 per cent of GDP in 2021-22.
Rise of digital payments
The report argues that formalisation efforts are bearing fruit in terms of the currency to GDP ratio.
“Our estimate also shows that because of the pandemic people may have been holding as much as ₹3.3 lakh crore in cash for precautionary motive beginning FY21. If we adjust for such currency transactions, the currency to GDP ratio for pure payment purposes may have actually declined in FY21 compared to earlier years,” it said.
Payment companies affirm that digital payment modes have been gaining popularity.
“As a percentage of business payments, cash usage will go down and it is constantly going down. A lot of business payments are now moving into the digital space, we have seen that in Covid. Cash in circulation is a different metric and there are multiple reasons that cash stays in circulation,” said Harshil Mathur, CEO and Co-founder, Razorpay.
Cash intensive economy
However, to expect cash usage to completely go away is unlikely.
Anush Raghavan, President - Cash Management Business, CMS Info Systems said that cash in circulation is expected to continue to grow at approximately 10 per cent to reach ₹41.5 trillion by 2024-25.
“The CMS Cash Index is back to pre-Covid levels of February 2020 despite the reduction in economic activity. With mobility picking up and offices opening, we expect a further increase in cash usage. During the festival season in October 2021, we have seen an increase of 10 per cent month on month in the CMS Cash Index," he further said.
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