Digital Payments Increases But Cash Remains First Choice: Research
Cash is still preferred as a savings instrument for its 'store of value' feature and also for precautionary purposes, according to the Reserve Bank of India's research. Therefore, the demand for cash would rise as the economy grows, the paper mentioned.
Titled 'Cash versus Digital Payment Transactions in India: Decoding the Currency Demand Paradox,' this research found that sustained growth in currency demand is dependent on precautionary and store-of-value motives, while the use of cash as a payment medium continues to fall.
The lower rate of return on alternative investments (or even a negative real return) before 2022-23 might have transformed into increased demand for non-interest-bearing assets like currency.
It is worth mentioning that while the share of currency in M3 (Broad Money) has witnessed a steady fall since the year 1951-52, it has shown faster growth than total deposits during periods of major policy shifts and crises.
Also, in line with the global scenario, the pandemic led to a transitory uptick in currency demand in India, primarily driven by precautionary and store-of-value motives, the paper mentioned.
The precautionary behavior in cash usage is also proven by the excess financial savings of households, which rose to 15.5 per cent of the Gross National Disposable Income (GNDI) in 2020-21 from 11.7 per cent in the previous year. The analysis also highlights that for transaction purposes, digital modes are increasingly substituting cash.
In addition to being a medium of transaction, cash also serves as a hedge during uncertain periods, like the Covid-19 pandemic, leading to increased demand for cash driven by precautionary motives. Sufficient evidence highlights that precautionary variables increase currency demand.
Overall, it is observed that digital payments are slowly substituting the transactional demand for cash, but the store-of-value motive of holding cash remains prominent.
The views suggested in the paper are those of the authors and not those of the central bank.
