1248209 SIP myths you must know!

Despite the galloping usage of UPI both in terms of number of users and quantum of transaction as a means of payment, cash is still the preferred mode as a savings instrument for its ‘store of value’ and for precautionary purposes, a research paper by Reserve Bank of India (RBI) economists has stated. Moreover, instead of going down, the demand for cash would rise with the growth of the economy, it has also observed.

“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,” authors Sakshi Awasthy, Rekha Misra and Sarat Dhal wrote in a paper titled ” Cash versus Digital Payment Transactions in India: Decoding the Currency Demand Paradox.”

However, it needs to be mentioned that the essay reflects the views of the authors and not necessarily those of the RBI.

Incidentally, the number of UPI transactions in India rose to more than 1,141 crore, a rise of 8% compared to the number in September. The cumulative value of the transactions stood at 17.16 lakh crore in the same month.
Besides being a medium of transaction, cash serves a crucial purpose – a hedge during periods of uncertainty. For example, the Covid pandemic stimulated this usage of cash. The paper stated that empirical evidence suggests that precautionary variables raise the demand for currency.

The paper comes against the backdrop of Prime Minister Narendra Modi urging the citizens to make payments in UPI for a month.

The RBI paper also stated that lower return on alternative investments (or negative real return) during the period prior to 2022-23 might have translated into increased demand for cash. Notably, while the share of currency in M3 has witnessed a steady fall since 1951-52, it has displayed faster growth than total deposits during periods of crisis and major policy shifts.

The rise in the demand for cash during the crisis periods such as the pandemic was in line with the global evidence, the paper said.

The precautionary behaviour in cash usage was also apparent from the excess financial savings of households, which rose to 15.5% of the Gross National Disposable Income (GNDI) in 2020-21 from 11.7% a year ago.