A drop in currency in circulation during the Diwali week is representative of a structural transformation in the economy, according to a research note from the State Bank of India.
Currency in circulation shrank on a weekly basis during Diwali week for the first time in 20 years, according to a Nov. 3 note from Soumya Kanti Ghosh, chief economic adviser at the State Bank of India Group.
“Technological innovations have changed the Indian payment system,” Ghosh said. Over the years, India’s cash-based economy has transformed into a smartphone-based payment economy, he said, attributing the change to the government’s move towards digitizing the internet. ‘economy.
A decline in currency in circulation is also akin to a reduction in CRR for the banking system, as it leads to less deposit outflow and will have a positive impact on monetary transmission, Ghosh said.
A review of retail digital transaction data shows that NEFT holds a 55% share by value and most transactions are conducted either in-branch or through online banking. Payments via smartphones, such as UPI, IMPS and e-wallet, account for a share of around 16%, 12% and 1% respectively. Thus, small retail payments via UPI/e-wallets account for about 11-12% in the payments industry, Ghosh estimated.
The trends are telling, as the share of currency in circulation in payment systems fell from 88% in FY16 to 20% in FY22, and is expected to decline to 11.15% in the EX27, Ghosh said. Consequently, the share of digital transactions increased from 11.26% in FY16 to 80.4% in FY22 and is expected to reach 88% in FY27, he added. .
Empirically testing the outcome of UPI transactions on currency in circulation, Ghosh’s findings indicate that:
The increase in Prepaid Payment Instruments has a negative impact on the CIC and the M0 (monetary base). Moreover, the increase in the PPI positively affects the M3 (broad money).
Increasing UPI negatively affects M0 and M3 but has no significant impact on CIC.
The monetary base includes currency in circulation as well as deposits held by the central bank. Broad money is defined as the total stock of money (paper notes, coins, and demand bank deposits) in circulation held by the public at any given time.
It was also found that increasing IPU and PPI does not significantly affect the money multiplier, although the coefficients are negative.
It has been estimated that every Rs 1 crore increase in UPI leads to a decrease in M0, M3 and SCB deposits by Rs 0.81 crore, Rs 0.96 crore and Rs 1.22 crore, respectively.
Furthermore, every Rs 1 crore increase in the PPI leads to a decrease in CIC, M0 and SCB deposits by Rs 1.52 crore, Rs 3.28 crore and Rs 0.23 crore, respectively.
Every Rs 1 crore increase in the PPI leads to an M3 increase of Rs 11.79 crore.