The cash paradox

There are several advantages of cash transactions. Settlement happens immediately, and there is no transaction cost. Besides, they preserve privacy. Digital transactions leave a trail and can be traced. Thus, there are reasons why people prefer using cash despite the significant expansion in digital mediums of transactions. The rapid increase in digital transactions, thanks to the phenomenal success of Unified Payments Interface, would intuitively suggest that the use of cash in the economy has declined. However, this is not the case. This aspect was recently highlighted by Reserve Bank of India (RBI) Deputy Governor Shirish Chandra Murmu in an address in Jakarta, Indonesia. He noted that despite the adoption of digital payments, cash in circulation had not declined, particularly in rural and semi-urban areas, low-income groups and small businesses. 

Regulating the issue of banknotes was one of the main reasons for the establishment of the RBI in 1935. The central bank has been performing this function with the support of the banking system and other institutions. Currently, about 176 billion rupee notes are in circulation, which is much higher than what it is for dollars or euros, largely because the mix is tilted towards lower-denomination notes. This leads to a large volume of injection of new notes into the system and absorption of damaged ones. Every year 28-30 billion new notes are printed, and about 21 billion pieces are disposed of. It is always important that notes are of good quality and have the necessary security features. Running the currency system effectively is absolutely necessary to preserve monetary sovereignty. The RBI is now planning to issue polymer notes on a trial basis. This will help improve the durability of the note and would be economical over the long run. 

As Mr Murmu noted, currency in circulation is growing at double-digit rates even as the share of cash in individual transactions is declining. This makes demand projections difficult for the RBI and complicates things in terms of production and distribution. Sustained demand for cash in the Indian economy must be debated. It is worth remembering that India had withdrawn high-value notes, worth about 86 per cent of currency in circulation by value, in 2016. Although the use of digital medium has increased since then, the demand for cash has not declined substantially. The cash -to -gross domestic product (GDP) ratio was 11.9 per cent in 2015-16. It went up to over 14 per cent in 2020-21 and was at 11 per cent in 2025-26. According to the data compiled by the Bank for International Settlements, the number in 2024 was at 7.9 per cent in the United States and about 3 per cent in the United Kingdom and Brazil. 

There could be several reasons for sustained demand for cash in the Indian economy. For instance, it could be a reflection of a large informal economy, which avoids digital means. Some may be using cash to avoid paying taxes. Anecdotal evidence suggests, for this reason, cash is heavily used in the construction and real estate. Thus, both the Union and state governments are likely losing tax revenue from this sector. However, it must be noted that the prevalence of cash by itself is not an indication of black money. There could be other reasons such as convenience or a lower opportunity cost of holding cash. Japan, for instance, has had low interest rates for many years and a cash-to-GDP ratio of over 20 per cent. Given the overall conditions, cash demand in India appears high and is worth probing.