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Cash is back as king but digital owns the throne

One is the incidence of cash coming back into the economy even as digital transactions continue to rise unabatedPremium
One is the incidence of cash coming back into the economy even as digital transactions continue to rise unabated

Disruptions that have taken place as a fallout of the covid-19 pandemic have reflected themselves in many ways. One is the incidence of cash coming back into the economy even as digital transactions continue to rise unabated. Mint explores if the shift is temporary or here to stay.

Disruptions that have taken place as a fallout of the covid-19 pandemic have reflected themselves in many ways. One is the incidence of cash coming back into the economy even as digital transactions continue to rise unabated. Mint explores if the shift is temporary or here to stay.

What does the data on cash in economy say?

As on 28 October 2016, before the government demonetized all 1,000 and 500 currency notes on 8 November 2016, the currency with public stood at 17 trillion. This figure grew to 25.85 trillion as on 25 September of this year—a 52% jump in almost four years. The surge occurred even as UPI-based digital transactions rose 60% in value terms in the last six months alone to 3.29 trillion. The Reserve Bank of India data on money supply and the National Payments Corporation of India numbers on United Payments Interface transactions thus point to an interesting co-existence of divergences.

Why are the people hoarding more cash?

The covid-19 pandemic has forced companies to cut jobs and salaries, creating uncertainty. People are worried about their future and have cut back spending on travel, food, fuel, clothing, and other discretionary items. Lockdowns have also exacerbated weakness in overall consumption. At the same time, interest rates on saving deposits have come down—State Bank of India offers 2.7% interest on them—thus proving to be a disincentive for people to park their excess money with banks in savings account. Expectedly, people will thus prefer to either keep their money as cash in hand or invest it in other instruments.

Gaining currency
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Gaining currency

What are the reasons for a surge in  digital  transactions?

The government has been relentless in its push to formalize and digitize the economy. The pandemic has caused disruption here too, albeit in a different way. The fear of contracting infection by handling currency notes for daily transactions has also pushed people to use digital platforms for the sale and purchase of goods and services.

What about mismatch in FD, savings money?

The currency with public surged 10% during April-September, an outcome that IIM Shillong associate professor of finance Neelam Rani blames on economic uncertainty. A part of it could also be attributed to planned spends during festive season, she says. Money in demand deposits, which people can withdraw any time, has come down by 2.3% while time deposits with banks are up 5.9% this year. So, people, short of ways to increase money are choosing to lock it for that little higher interest rate on fixed deposits, instead.

Is this phenomenon here to stay for long?

It’s difficult to predict people’s behaviour with respect to money but the scenario of people keeping more cash with them could linger for a while till the uncertainty lasts. Charan Singh, a former RBI chair professor at IIM Bangalore, cautions that this could lead to the creation of black money as people, faced with struggling businesses, resort to hiding their incomes to escape paying taxes, thus leading to unaccounted money. Be that as it may, digital transactions will continue to jump as the economy gets driven by organized sectors.

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