In a remarkable development, for the record second consecutive time in 20 years, the currency in circulation (CIC) declined during the Diwali week, SBI Research's latest Eecowrap note says.

It attributes innovations in technology to changing the Indian payment system, which, over the years, has changed to a "smart-phone lead payment economy". Notably, a lower currency in circulation also is akin to a cash reserve ration (CRR) cut for the banking system, as it results in less leakage of deposits and positively impacts monetary transmission.

"The success of the digital journey is primarily due to the relentless push by the government to formalise and digitalise the economy. Further, the interoperable payments systems like UPI, wallets & PPIs have made it simple and cheaper to transfer money digitally, even for those who don’t have bank accounts," the report adds.

Over the years, India's payments system has seen a rapid transformation, with new innovations like QR code, NFC, etc., revolutionising the space and has also seen the swift entry of big tech firms in this industry. In October 2023, UPI transactions increased to 853 million at value worth ₹1,36,600 crore.

"...In simple terms, it implies that the RBI has to print less of currency given that UPI transactions impact currency in circulation with a lag. This is a win-win for both RBI and government, as it results in saving of seignorage costs and also a less cash economy. This will also mean all the analysis of currency leakage impacting bank deposits, liquidity estimation now could see a fundamental reorientation in the future!" writes Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.

India’s digital payment journey is built on the India stack -- a comprehensive digital identity, payment and data management system. These open-access software standards facilitate digital payments between banks, fin-techs and digital wallets.

In retail digital transactions, NEFT holds around 51% share in value terms and most transactions are either done via a branch or Internet banking. However, the share of transactions done via smartphones using NPCI platforms like UPI and IMPS stands at 21% and 8.5%, respectively.

The value of banknotes in circulation rose 7.8% year-on-year to ₹33.48 lakh crore in 2022-23 as compared with 9.9% during the previous fiscal, according to the Reserve Bank of India's annual report. In volume terms, currency in circulation increased by 4.4% to 13,621 crore pieces during the year ended March. ₹500 denomination constituted the highest share at 37.9%, followed by ₹10 denomination banknotes which constituted 19.2% of the total banknotes in circulation as of March 31, 2023.

Besides, the total value of ₹2000 banknotes in circulation, which amounted to ₹3.56 lakh crore as of the close of business on May 19, 2023, when the withdrawal of ₹2000 banknotes was announced, has declined to ₹0.10 lakh crore as at the close of business on October 31, 2023. Thus, more than 97% of the ₹2000 banknotes in circulation as of May 19, 2023, have since been returned, says the RBI.

The functions relating to the issuance of currency — both banknotes and coins — and their management are performed by the Reserve Bank through its 19 issue offices, 2,838 currency chests and 2,293 small coin depots spread across the country.

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