Currency in Circulation (Cash to GDP ratio)

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 India’s 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 India’s 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.