India’s cash-lead economy now has changed to smart-phone lead payment economy, with the currency in circulation (CIC) declining for the first time in 20 years during the Diwali week, according to State Bank of India’s economic research report “Ecowrap”.

“The Indian economy is undergoing a structural transformation. In a remarkable development, for the first time in 20 years, currency in circulation declined during the Diwali week. The innovations in technology has changed the Indian payment system.

“...A lower currency in circulation also is akin to a CRR (cash reserve ratio) cut for the banking system, as it results in less leakage of deposits and it will impact monetary transmission positively!” said Soumya kanti Ghosh, Group Chief Economic Adviser, SBI.

According to SBI Research, the weekly movement in currency in circulation (CIC) during Diwali week shows a decline of ₹7,600 crore in 2022 against an increase of ₹43,800 crore and ₹44,000 crore in 2020 and 2021, respectively.

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The trends in the total payments system are revealing, as the share of CIC in payment systems has been declining from 88 per cent in FY16 to 20 per cent in FY22 and is estimated to go down further to 11.15 per cent in FY27, per the report.

Consequently, the share of digital transactions has increased from 11.26 per cent in FY16 to 80.4 per cent in FY22 and is expected to touch 88 per cent in FY27.

Ghosh noted that the success of the digital journey is primarily due to the relentless push by the government to formalize and digitalise the economy. Further, the interoperable payments systems like unified payments interface (UPI), mobile wallets and pre-paid instruments (PPIs) have made it simple and cheaper to transfer money digitally, even for those who don’t have bank accounts.

Over the years, the system has expanded rapidly with new innovations like QR code, NFC, etc. and has also seen the swift entry of big tech firms in this industry.

“If we look at the latest retail digital transactions data, NEFT holds a share of 55 per cent in value terms and most of the transactions are done through either at branch or through internet banking.

“However, if we look only transactions done through smart phones like UPI, IMPS & e-wallet, they have share of around 16 per cent, 12 per cent and 1 per cent respectively,” Ghosh said.

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So, the small retail payments done through UPI/e-wallets holds around 11-12 per cent in the payment industry.

The slow pace of ‘m-wallets’ may be due to the rise in UPI payments from August 2016 onwards reaching ₹12 lakh crore in October 2022, capturing the market very quickly, the report said.

Monetary aggregates

Interestingly, the impact of UPI transactions on monetary aggregates is revealing in terms of the structural VAR (vector autoregressive) model, per the report.

“In case of CIC, it results in a decline in CIC for around 3 months than it wanes out after 4 months. In case of M0 (reserve money), it results in a decline in M0 for one month and starts waning out after 4 months.

“In simple terms, it implies that the 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 government, as it results in saving of seignorage costs and also a less cash economy,” Ghosh said.

This will also mean all the analysis of currency leakage impacting bank deposits, liquidity estimation now could see a fundamental reorientation in the future, he added.