Nine Years After Demonetisation: Why Cash in Circulation Remains High

Demonetisation Latest News

• Currency with the public has risen from ₹17.97 lakh crore in November 2016 to ₹37.29 lakh crore in October 2025, more than doubling since demonetisation. 
• Although cash holdings surged, the rapid economic growth of over 6% annually has kept the currency-to-GDP ratio below pre-demonetisation levels, indicating that India’s expanding economy has absorbed the rise in currency circulation.

Demonetisation of November 2016

• On November 8, 2016, Prime Minister Narendra Modi announced the demonetisation of ₹500 and ₹1,000 notes, which made up 86% of the currency in circulation. 
• Effective from midnight of November 9, the move aimed to eliminate black money, curb fake currency, promote digital payments, and formalise the Indian economy.

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Economic Disruption and Lasting Cash Dependence After Demonetisation

• The 2016 note ban caused a sharp liquidity crisis, reducing demand and GDP growth by about 1.5%. 
• Many small businesses shut down amid cash shortages, and long queues formed at banks and ATMs. 
• Though new notes were introduced later, a mix of cash hoarding and continued reliance on currency pushed the money in public hands above pre-demonetisation levels, showing India’s enduring preference for cash.

Pandemic Led to Surge in Cash Holdings

• During the Covid-19 lockdown (2020–21), people rushed to keep cash on hand for essentials such as groceries and medicines. 
• This precautionary behaviour drove a sharp rise in cash with the public, reversing the earlier post-demonetisation decline.

Understanding Currency with the Public and India’s Cash Usage Trends

• According to the RBI, “currency with the public” is the total currency in circulation (CIC) minus the cash held by banks.
• CIC includes all notes and coins issued by the central bank used in daily transactions.
• As of October 17, 2025, cash with the public rose by ₹30,709 crore fortnightly and ₹3.13 lakh crore year-on-year.

Currency-to-GDP Ratio Trends

• While the absolute amount of currency has increased, strong GDP growth—7.8% in Q1 FY2026—has stabilised the CIC-to-GDP ratio.
• The ratio climbed from 8.7% (2016–17) to 14.5% (2020–21) during the pandemic, then fell to 11.11% in 2025, indicating a gradual shift towards digital payments.
• A lower ratio signifies better monetary transmission, reduced cash dependence, and stronger inflation control.

Global Comparison

• India’s 11.11% currency-to-GDP ratio remains higher than major economies—Japan (9–11%), Eurozone (8–10%), China (9.5%), Russia (8.3%), and the U.S. (7.96%).
• The higher ratio in India reflects its large informal economy, cash preference, and slower—but improving—digital payment adoption.

Cash Still Dominates Despite Digital Growth

• Despite efforts to build a “less-cash society,” India’s cash usage remains high.
• The Unified Payments Interface (UPI) has revolutionised digital payments, processing 185.9 billion transactions in FY25 and growing at a 49% CAGR between FY23–FY25.
• UPI’s deep penetration in tier-2 and tier-3 cities signals a strong digital shift, yet cash remains deeply entrenched in daily economic activity.

Conclusion

• India’s cash dependency remains significant despite record digital payment growth. A stable currency-to-GDP ratio reflects the coexistence of cash comfort and digital confidence in the evolving Indian economy.

Source: IE | ToI