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Cash may still be king despite the increase in digital transactions 

Despite a slowdown in digital transactions post-COVID, the demand for cash in the country remains. According to a research paper by RBI economists, cash is still preferred for savings due to its ‘store of value’ and preventive purposes. The paper suggests that as the economy grows, the demand for cash will rise.

“This paper finds that the sustained growth in currency demand is influenced by the precautionary and store-of-value motives, while the use of cash as a payment medium continues to fall,” say, Sakshi Awasthy, Rekha Misra and Sarat Dhal in a paper titled “Cash versus Digital Payment Transactions in India: Decoding the Currency Demand Paradox” published in its latest volume of “Occasional Papers”. The views, however, are those of the authors and not those of the central bank.

The lower return on alternative investments, or negative real return, before 2022-23 may have led to increased demand for non-interest-bearing assets like currency. Although the share of currency in M3 has steadily declined since 1951-52, it has shown faster growth than total deposits during crises and significant policy shifts.

In line with global evidence, the pandemic caused a temporary increase in currency demand in India, mainly driven by precautionary and store-of-value motives, according to the paper.

Precautionary behavior in cash usage is evident from the rise in excess financial savings of households, increasing from 11.7% to 15.5% of the Gross National Disposable Income (GNDI) in 2020-21. The analysis also indicates a growing substitution of cash by digital means for transaction purposes.

Cash, beyond its role in transactions, acts as a safeguard during uncertain periods like the COVID-19 pandemic. This is evident in the heightened demand for cash driven by precautionary motives during such times. Empirical evidence supports the idea that precautionary factors contribute to the increased demand for currency.

While digital payments are gradually replacing the need for cash in transactions, the paper highlights that the store-of-value aspect of holding cash remains unaffected.

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BRL Editorhttps://businessreviewlive.com
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