Cashless gains currency as cash in circulation drops
The currency in circulation has fallen substantially as the economy opened up after the second wave of the pandemic moderated, with digital modes of payments gaining currency. It is too early to say if people have overcome their fears leading to cash hoarding, but the trend, if it sustains, is encouraging.
The latest data released by the Reserve Bank of India (RBI) showed that the year-on-year growth in currency in circulation has fallen to 10 per cent as of August 13, against 22.4per cent growth rate a year ago.
This is a steep fall, considering the economy is still not out of the woods, and the fear of successive waves of the pandemic still looms large. However, analysts say this may point to two issues: the currency in circulation has already reached a substantially large level at ~29.6 trillion, and any incremental increase thereafter would only be marginal.
It could also mean that there is less leakage from the banking system, which means most of the money in circulation is reaching formal channels, mostly as deposits. People’s preference for digital payments seems to have eliminated the need to withdraw cash from banks.
“The banking system is currently witnessing a recovery in deposit growth after the second wave when deposit growth was negative, with a large growth in currency in circulation to possibly account for uncertainty,” said Soumya Kanti Ghosh, group chief economic advisor of State Bank of India Group.
“This growth in deposits possibly reflects reduced uncertainty, with the Covid wave receding. However, this might also result in a problem of plenty for banks if credit continues to be a laggard,” added Ghosh.
The dependence upon cash has reduced, especially among retail consumers, as more and more people have adopted various digital payment platforms at their disposal for their day-to-day transactions.
Experts believe the Covid-19 pandemic has done more to digitising payments in India than what demonetisation did, and the digital future is here to stay. What would otherwise have taken five to 10 years to achieve for India’s digital payments ecosystem, the pandemic has done in a year’s time.
“The pick-up in digital payments has played a part in bringing down the growth in currency in circulation, but we cannot draw a direct correlation between the two,” said Mihir Gandhi, partner & leader, payments transformation, PWC India, adding that the central bank’s digital currency will be a step forward in that direction.
“The RBI gradually pushing out high denomination notes from circulation has played a huge role in bringing down the growth in currency in circulation. But it is too early to say if this trend will hold because two years after demonetisation, we saw the currency in circulation was back to where it was pre-demonetisation (not adjusted for inflation),” said Gandhi.
According to a PWC report, prior to 2010, digital transactions saw single-digit growth. From 2010 to 2016, this figure rose to 28 per cent, owing to the launch of faster payment modes in the country and jumped to 56 per cent in 2016–17 (FY17), following demonetisation.
Covid-19 has further accelerated the shift to digital payment modes. Together, these factors are likely to create a revenue pool of ~2.93 trillion by 2024–25 for payment players - a figure that stood at ~1.9 trillion in 2019–20. Among various retail digital payment platforms, the Unified Payments Interface (UPI) has emerged the most popular and most widely used for peer-to-peer payments. The UPI made up for 10 per cent of overall retail payments in 2020-21, or FY21 (excluding real-time gross settlement), growing at a compound annual growth rate of 400 per cent between FY17 and FY21.
Until a few years ago, the UPI’S share in overall retail payments was only 2 per cent. Launched in 2016, the UPI, although a late entrant to the retail payments space, saw its FY21 annual throughput value at ~41 trillion, almost 2.8x that of credit and debit card at point-of-sale combined, and almost 20x that of prepaid payment instruments, stated a research report by Macquarie.
In July 2021, the UPI processed a record 3.24 billion transactions, up 15.7 per cent from June, when it processed 2.8 billion transactions.
In value terms, the platform processed transactions worth ~6.06 trillion in July, up 10.76 per cent from June, which is also an all-time high.
The UPI crossed 1 billion transactions for the first time in October 2019. The next 1 billion came in under a year. In October 2020, the UPI processed over 2 billion transactions for the first time. Further, the journey from 2 billion transactions a month to 3 billion was traversed in 10 months, indicating the incredible popularity of the UPI as a platform for retail digital payments.