Why cash continues to thrive even as India's digital payments grow

Why cash still thrives even as India’s digital payments expand

Every year, more Indians tap, scan and swipe. Every year, they also keep more paper money.

The Reserve Bank of India (RBI), the country’s central bank, now has 176 billion banknotes in circulation. It prints 28-30 billion new notes each year across six denominations and withdraws about 21 billion. It is an enormous logistics exercise.

Yet even as Unified Payments Interface (UPI) digital transactions race toward a billion a day, the amount of cash circulating in the economy continues to rise quickly.

“Currency in circulation continues to grow at double-digit rates even as cash's share of individual transactions declines, thanks to growing digital payment adoption. That combination makes future demand harder to predict, which complicates our planning for production and distribution capacity,” Shirish Chandra Murmu, RBI deputy governor, said in a speech to central bankers in Jakarta last month.

India built the world’s biggest digital payments miracle.

He described it as the “cash paradox”. But what does currency in circulation actually mean?

It refers to the total value of physical banknotes and coins held by the public and businesses, whether they are spent or simply kept. In India, cash reaches people through four main routes: the RBI’s 19 regional offices; bank branches; more than 250,000 ATMs and cash dispensers; and millions of “business correspondents”, local agents who offer basic banking services in rural areas and smaller towns.

By any standard, that is a massive amount of cash. For comparison, Murmu said about 56 billion US dollar bills and 30 billion euro banknotes were in circulation at the end of last year.

There is a caveat to that comparison: the RBI’s figure is partly inflated by a larger share of lower-value notes, which means more notes are needed to represent the same transaction value.

The mystery is not that Indians still use cash — 94% of transactions were cash-based as recently as 2019, according to new research.

The mystery is that cash is increasing even as its role in everyday payments shrinks.

“The cash paradox has been examined globally, and India is a unique and novel case study of the same given the scale of both cash and non-cash payments,” Tagat, an economist who studies Indian payment behaviour, told the BBC.

He says the rise of cash alongside digital payments has been especially visible since the 2007-08 global financial crisis, with Bank for International Settlements research showing a similar trend around the world.

In Tagat’s view, currency still has three functions — as a means of payment, a store of value and a hedge against calamity. Apps are replacing only the first. That is why digital payments alone cannot explain the full picture of cash demand.

India’s 2016 “demonetisation” overnight invalidated 86% of the country’s cash by value.

David Humphrey of Florida State University, who has studied cash use across 14 economies with co-author Tanai Khiaonarong, says digital payment adoption is only one of several forces that can affect how much cash people hold.

That leads to another question: are households keeping more cash outside the banking system — for emergencies, safekeeping or to buy assets such as gold in India?

He also points to a factor that matters especially for major reserve currencies: much of the growth comes from notes held or used abroad, rather than in the country that issued them.

The US is a clear example. Large-denomination $50 and $100 notes are widely held and used overseas but are “rarely seen in normal domestic legal cash transactions”, Humphrey says.

He add that the Federal Reserve regularly receives unfit US currency from abroad, replaces it with fit notes and sends them back to the sender. Most of the value of these unfit notes is in $50 and $100 bills.

That, he says, helps explain why the Fed reports that the total value of US currency in circulation keeps rising even as the value of cash withdrawn from domestic ATMs — a proxy for everyday spending, mostly in $20 notes, along with $5 and $10 bills — has recently declined.

The European Central Bank (ECB) has also seen euro banknotes in circulation rise from about €1 trillion in 2016 to €1.6 trillion this year.

There is also the less visible side of the cash economy. Humphrey’s research identifies the rising value of domestic illegal activity, which often depends on unrecorded cash transactions, as one structural reason currency growth can outpace recorded spending — a factor especially relevant to India.

Property transactions in India routinely involve cash payments, partly because stamp duty and government-set “circle rates” can lag behind market prices, giving buyers and sellers an incentive to understate the deal and pay the difference in cash.

, which overnight invalidated 86% of the country’s cash by value in 2016, targeted the stock of “black” cash but left this flow largely untouched, economists say. That helps explain why decades of estimates of “black money” tied up in real estate have never produced a dependable figure.

Then there is what might be called the psychology of frictionlessness. Tagat points to research, including work published recently in the Journal of Consumer Research, showing that digital payments are increasingly designed to remove the “pain” of paying — the wince of handing over notes — and replace it with a satisfying beep.

In theory, that should reduce cash demand further. The fact that it has not suggests something else is supporting currency: fear — not only fear of spending, but fear of what happens when digital systems fail.

More than 550 million Indians use the digital Unified Payments Interface (UPI) payment system.

Here, the Indian experience echoes Europe’s.

Philip Lane, the ECB’s chief economist, told a summer conference in Ireland this year that while the number of notes used in transactions is falling, the stock held by households keeps rising — exactly what Murmu referred to in Jakarta.

Clearly, cash, in wealthy democracies as much as in India, is being recast as essential infrastructure for bad times rather than good ones.

McCarthy puts it most plainly: the elderly, the rural poor, domestic-violence victims hiding transactions from an abuser, and children learning what money is all depend on it. “Some consumers,” she told me, “prefer the privacy and convenience of cash.”

For India’s RBI, that creates an awkward budgeting challenge.

It operates its own paper mills, four currency printing presses and ink plants — a whole supply chain designed for self-reliance — while also promoting the world’s most successful instant-payments network.

Tagat says this leaves the RBI with a difficult decision: how much to spend on managing cash and how much on encouraging digital payments, especially as trials of 10 and 20 rupee polymer notes — first proposed a decade ago — finally begin.

Murmu described dependable cash as part of “monetary sovereignty”. Tagat says the rupee’s informal use across South Asia gives India another reason to keep its currency machinery running, as a shock absorber for the wider region.

“The RBI,” Tagat says, “has a strong case for keeping cash going despite new digital payments alternatives.”

If UPI, as reported, begins charging transaction fees on smaller payments, cash could win back share even in payments, not just in savings, he adds.

The policy lesson is clear, and a little humbling: digital payments have not made cash obsolete. Cash is less a technology being displaced than an insurance policy no one wants to surrender.