Virendra Pandit
New Delhi: Days after the Reserve Bank of India (RBI) launched a pilot project for the country’s digital rupee (Central Bank Digital Currency, or CBDC), India’s largest lender, State Bank of India (SBI), has revealed that the nation’s cash-led economy has now effectively changed to smartphone-led payment economy.
Because of this transformation, the share of digital transactions has increased from 11.26 percent in 2015-16 to 80.4 percent in FY22 and is expected to touch 88 percent in FY27.
For the first time in 20 years, India’s currency in circulation (CIC) declined during Diwali week last month (October 18-24), SBI’s economic research report “Ecowrap” said on Thursday.
“The Indian economy is undergoing a structural transformation. In a remarkable development, for the first time in 20 years, currency in circulation declined during Diwali week. Innovations in technology have changed the Indian payment system.
“…A lower currency in circulation also is akin to a CRR (cash reserve ratio) cut for the banking system, as it results in less leakage of deposits and it will impact monetary transmission positively!” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
According to SBI Research, the weekly movement in currency in circulation (CIC) during Diwali week shows a decline of Rs. 7,600 crores in 2022 against an increase of Rs. 43,800 crore and Rs. 44,000 crores in 2020 and 2021, respectively.
The trends in the total payments system are revealing, as the share of CIC in payment systems has been declining from 88 percent in FY16 to 20 percent in FY22 and is estimated to go down further to 11.15 percent in FY27, the report said.
The success of the digital journey is primarily because of the relentless push by the government to formalize and digitalize the economy. Also, interoperable payment systems like Unified Payments Interface (UPI), mobile wallets, and pre-paid instruments (PPIs) have made it simple and cheaper to transfer money digitally, even for those who don’t have bank accounts, Ghosh said.
Over the years, the system has expanded rapidly with new innovations like QR codes, NFC, etc., and has also seen the swift entry of big tech firms in this industry.
“If we look at the latest retail digital transactions data, NEFT holds a share of 55 percent in value terms, and most of the transactions are done through either a branch or through internet banking.
“However, if we look only at transactions done through smartphones like UPI, IMPS & e-wallet, they have a share of around 16 percent, 12 percent, and 1 percent respectively,” he said.
The small retail payments done through UPI/e-wallets hold around 11-12 percent in the payment industry.
The slow pace of ‘m-wallets’ may be because of the rise in UPI payments from August 2016 onwards reaching Rs. 12 lakh crores in October 2022, capturing the market very quickly, the report said.
With this progression, the RBI will need to print less of currency given that UPI transactions impact currency in circulation with a lag. This is a win-win for both the central bank and the government, as it saves costs and leads to a less-cash economy.
This will also mean all the analysis of currency leakage impacting bank deposits, and liquidity estimation now could see a fundamental reorientation in the future, Ghosh added.