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Cash Preferred as a Savings Instrument, but Usage Declines as a Payment Medium: RBI Paper

The paper says that cash continues to be preferred as a savings instrument due to its 'store of value' and for precautionary purposes.
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New Delhi: Despite a slowdown in the post-COVID surge in digital transactions, the demand for cash in the country persists, according to a research paper by RBI economists.

The paper, titled “Cash versus Digital Payment Transactions in India: Decoding the Currency Demand Paradox,” says that cash continues to be preferred as a savings instrument due to its ‘store of value’ and for precautionary purposes. As the economy grows, the demand for cash will increase, says the paper.

Authors Sakshi Awasthy, Rekha Misra, and Sarat Dhal say, “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.” The views expressed in the paper are those of the authors and not necessarily reflective of the central bank’s stance.

According to the Economic Times, which cited this paper, 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.

The global evidence also aligns with the observation that the pandemic led to a temporary increase in currency demand in India, primarily driven by precautionary and store-of-value motives, the paper notes.

Precautionary behaviour in cash usage is evident from the increased excess financial savings of households, rising to 15.5% of the Gross National Disposable Income (GNDI) in 2020-21 from 11.7% the previous year. While cash is being increasingly substituted by digital means for transaction purposes, the paper underscores that cash’s role as a hedge against uncertain periods, such as the COVID-19 pandemic, remains intact.

Empirical evidence suggests that precautionary variables contribute to an increase in currency demand. In conclusion, the paper emphasises that digital payments are replacing the transactional demand for cash, but the store-of-value motive for holding cash persists.

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