Summary of this article
RBI faces difficulty forecasting currency demand amid digital payment growth.
India has 176 billion banknotes currently in circulation.
RBI explores polymer notes and coatings to extend note life.
The Reserve Bank of India (RBI) has faced difficulty in forecasting future demand for banknotes as currency in circulation has grown at double-digit rates despite the expansion of digital payments.
RBI deputy governor SC Murmu has highlighted the issue at a meeting of central bankers in Jakarta. Murmu has noted that cash has accounted for a declining share of individual transactions as digital payment adoption has grown. At the same time, currency in circulation has grown at double-digit rates.
This combination has made future demand for banknotes harder for the central bank to forecast. It has also complicated planning for banknote production and distribution capacity.
Cash Usage Has Continued Across Key Segments
The adoption of digital payments has expanded across India, but cash in circulation has not declined, Murmu has noted.
Cash usage has remained significant in rural and semi-urban areas, among low-income groups and older populations, and among small businesses.
India has produced between 28 billion and 30 billion banknotes annually across six denominations over the past few years. The country has disposed of roughly 21 billion banknotes a year during the same period.
At present, around 176 billion banknotes are in circulation in India.
Around 56 billion US dollar bills and 30 billion euro banknotes were in circulation at the end of last year, according to data presented by Murmu.
The number of banknotes in circulation has also reflected the denomination structure of a currency. India has a higher weightage of lower-value notes, which means more individual notes can be used for transactions involving the same value.
RBI Explores Ways To Extend Banknote Life
The RBI has been exploring ways to extend the life of banknotes. The measures under consideration include surface coatings on the substrate and polymer notes for lower denominations.
The central bank has also been working to reduce the carbon footprint of the cash cycle, stated Murmu.
The cash cycle covers the production, distribution, circulation and disposal of banknotes. Extending the usable life of banknotes can reduce the frequency with which notes need to be replaced and disposed of.
The annual production of 28 billion to 30 billion banknotes and the disposal of around 21 billion pieces have formed part of India’s currency management operations.
Currency Planning Becomes More Complex
The growth of digital payments has changed the share of cash in individual transactions, but the total stock of currency in circulation has grown at double-digit rates.
This has created a situation in which digital payments and physical currency have both expanded in different ways. Cash is being used across rural and semi-urban areas, among low-income and older populations, and by small businesses.
The RBI has therefore had to plan banknote production and distribution while tracking changes in both digital payment adoption and cash usage.
The central bank has also been looking into the durability of banknotes through measures such as surface coatings and polymer notes for lower denominations.
