According to a report by the Reserve Bank of India (RBI), India ranks number three in terms of usage of banknotes. This was revealed by the Central Bank’s report titled – Benchmarking India’s Payment Systems.


Key highlights

  • According to a report by the RBI, only Hong Kong and Japan have a higher ratio of currency-in-circulation (CIC) as a percentage of GDP compared to India.
  • High cash availability in Japan
      • A low crime rate, years of ultra-low interest rates and a nationwide network of ATMs have made cash appealing in Japan.
      • These factors gave people few reasons to shift to other modes of payments.
  • Currency-in-circulation (CIC) in India
      • According to the report, CIC in India increased to a high of 14.4% of GDP in 2020-21 from 10.7% of GDP in 2017-18.
      • As of June 24, currency-in-circulation in India stood at Rs 32.2 lakh crore.
      • The currency per capita works out to Rs 22,752, which is a pointer to hoarding of cash.
      • The report also highlights that high denomination notes are not being used for payments but as a store of value, especially in times of uncertainty like the Covid pandemic.
  • Reasons for high CIC in India
      • With the onset of Covid pandemic, there was a dash for cash across all jurisdictions.
      • Lockdowns were severe in India, as a result of which economic activity was impacted and there was steep contraction in GDP, relative to other countries.
      • The decline in GDP (denominator) contributed considerably to increase of CIC as percent of GDP for India in 2020.
  • High CIC helping RBI
      • High CIC helps the RBI in its current policy objective of tightening liquidity in the banking system.
      • If CIC dips by 10% with people returning the money they withdrew in the last two years into bank accounts, it would flood the banking system with over Rs 2 lakh crore of additional deposits.
      • However, in the long run, the policy objective is to reduce the dependence on cash in favour of digital.
  • China and Turkey witnessed a decline in the CIC
      • Only China and Turkey witnessed a decline in the CIC as percent of GDP in 2020 compared to 2017.


About the ‘Benchmarking India’s payment systems’

  • This report aims to assess the progress of Indias payments ecosystem against other major countries.
  • It compares the payments ecosystem in India with 21 countries where payment systems were considered robust, diverse and efficient.
  • The pilot exercise for benchmarking Indias payment systems was undertaken in 2019.
  • It also ascertains the strengths and shortcomings of the Indian payments ecosystem.
  • The exercise also seeks to examine the user preferences for payment systems and instruments vis-a-vis other jurisdictions.