2023-11-28 14:12:21
“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 that of the authors and not that of the central bank.
The lower return on alternative investments (or negative real return) during the period prior to 2022-23 might have translated into increased demand for non-interest-bearing assets like currency. Notably, while the share of currency in M3 has witnessed a steady fall since 1951-52, it has exhibited faster growth than total deposits during periods of crisis and major policy shifts.
Also, in line with the global evidence, the pandemic led to a transitory uptick in currency demand in India driven primarily by precautionary and store-of-value motives, th epaper said.
The precautionary behaviour in cash usage is also evident from the excess financial savings of households, which rose to 15.5 per cent of the Gross National Disposable Income (GNDI) in 2020-21 from 11.7 per cent a year ago. The analysis also suggests that for transaction purposes cash is being increasingly substituted by digital means.
In addition to being a medium of transaction, cash serves as a hedge once morest uncertain periods, such as the COVID-19 pandemic, which are marked by an increased demand for cash driven by precautionary motives. Empirical evidence indicates that precautionary variables increase currency demand.Overall, it is seen that digital payments are substituting the transactional demand for cash, but the store-of-value motive of holding cash remains intact, the paper said.
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