Currency Demand Paradox
The currency demand paradox, often referred to as the “paradox of banknotes,” is a phenomenon where the value of banknotes in circulation increases despite a decline in their use for payments. This intriguing trend has been observed in several nations since 2007, challenging the notion that digital payments would replace traditional cash transactions. In India, despite the remarkable growth of retail digital payments, the currency in circulation to GDP ratio peaked at 14.4% in 2020-21.
Exploring the Growth of Digital Payments
Retail digital payments in India have experienced impressive growth in both volume and value. From 2016-17 to 2021-22, digital payments led by the Unified Payments Interface (UPI) exhibited a compound annual growth rate (CAGR) of 50% in volume and 27% in value. This substantial expansion highlights the increasing adoption of digital payment modes in the country.
The Persistence of Cash Usage
The Reserve Bank of India (RBI) attributes the persistence of cash usage to various factors. Firstly, the decline in opportunity costs, such as low-interest rates, makes holding physical currency an attractive option for individuals. Secondly, precautionary holdings amid economic uncertainty lead people to rely on cash as a secure store of value. Additionally, the prevalence of a large informal economy contributes to the continued use of cash. Finally, the government’s direct benefit transfers, which promote both cash and digital modes, result in increased cash withdrawals.
The Impact of the Covid-19 Pandemic
The Covid-19 pandemic has had a significant impact on the currency demand paradox. During the pandemic, the growth of currency in circulation surged due to precautionary motives and the perception of cash as a safe asset in uncertain times. However, the transactional use of cash has gradually been substituted by digital payment modes, which offer convenience and contactless transactions.
Recent Trends and Growth Rates
Despite the pandemic-induced surge in cash demand, recent data suggests a turnaround. For the week ending March 24, 2023, currency in circulation witnessed a year-on-year growth rate of 7.8%, marking single-digit growth for 86 weeks (excluding April 2022) and averaging at 8.5% overall. Meanwhile, digital payment modes have continued their strong growth momentum, demonstrating the coexistence of cash and digital transactions.
Month: Current Affairs - June, 2023
Category: Banking Current Affairs