RBI Study Says Demand for Currency Could Rise Despite Digitization

In a low-interest rate, demand for the currency rises and falls when the rates are high, by a study of the staff of the Reserve Bank of India ( RBI). Therefore, given higher digital transactions, it has pointed out that the country will have to live with a greater number of currencies in circulation in the coming days.

The latest data from RBI shows that Rs 10.57 trillion amount of card and mobile payment was made for the first time in the fourth quarter of 2019-20 which is above Rs 9.12 trillion ATM transactions.

The gap may have grown further during the months because people do not want to enter public ATM machines due to the fear of the coronavirus impact.

In this financial year, analysts expect that the nominal GDP growth rate may be negative, but this does not mean that the circulating currency falls simultaneously. In the first four months of the 2020 calendar, CIC was above the full year of 2019 amid the decline in economic growth, according to the Business Standard. The CIC amounted to Rs 2.66 trillion between January and May 1. It fell by Rs 2.40 trillion in contrast during 2019 (January to December).

In the period 2020-21 (up to July 10), the circulatory currency increased by Rs 2.31 trillion, more than three-fold compared with last year, according to the latest WSS Weekly statistical supplement. Simultaneously, payments by Unified Payments Interface ( UII) hit an all-time high of 1.34 billion in June, up 9% from 1.23 billion in May. Transactions had decreased by strict lock-down interventions, to 999 million in April. It increased from Rs 2.18 billion on May, 18 per cent in June to Rs 2.62 trillion.

curreny in circulation
Business Standard

“The COVID condition, which can not be modelled by any model, is unparalleled (tail occurrence). The paper estimates also have a long-term average effect not juxtaposed in a tail event such as the case of COVID. Therefore, the paper ‘s results could be misleading, “said a senior economist who is considered an expert on RBI matters.

It also indicates that the effect of a current GDP slowdown on currency demand is reflected in many quarters.

The effect would gradually reflect currency demand if it lasts for a long time. “Therefore, there is no imminent sharp decline in the degree of GDP slowdown, in the current sense,” the expert said. However, continued use of digital transactions, particularly credit and debit cards, could mitigate currency increase.

Source: https://www.business-standard.com/article/finance/demand-for-currency-could-rise-despite-digitisation-finds-rbi-study-120071900390_1.html