Monetary puzzle: Why cash in circulation has risen in India even as UPI transactions set new records

Intriguingly, even as CiC has jumped, India continues to log record levels of Unified Payments Interface (UPI) transactions. For example, in January, the value of these stood at ₹28 trillion—or 70% of CiC.

Simultaneously, the cash-to-GDP ratio has declined in recent years to 11.2% in 2025-26 from 14.4% in pandemic year 2020-21. This shows that even as economic activity has been expanding at a rapid pace, currency is expanding at a much slower pace as UPI transactions have been substituting those in cash, specifically for day-to-day dealings.

Additionally, India’s monthly cash withdrawals from ATMs could surpass the long-term average of ₹2.5 trillion, with their numbers in states such as Karnataka, Tamil Nadu and West Bengal showing an uptrend. So, what explains this puzzle of high CiC co-existing with high UPI swipes? There are at least four reasons.

First, in July, the Karnataka Commercial Taxes Department had issued around 18,000 GST notices to small traders and vendors for UPI transactions exceeding the ₹40 lakh registration threshold between 2022 and 2025. This might have acted as a disincentive for UPI use.

To empirically test the hypothesis that government action pushed consumers and small traders into the shadows of cash in Karnataka and even in other states (selected randomly) through policy signalling, we employed a technique akin to a randomized control trial (RCT)—the intensity-based difference-in-differences (DiD) framework—in five states on ATM- withdrawal data.

The results of this DiD experiment indicate that in Karnataka, after GST notices were issued in July, the districts that had stronger ATM activity prior to that month continued to experience significant increases in ATM withdrawals every month on an average relative to the districts that had lower ATM activity before the issuance of GST notices. The empirical results are significant for West Bengal and Kerala, suggesting that GST notifications did create a perverse signalling impact in other states.

Second, the motivation to hold cash in 2025-26 has also grown, particularly in rural areas, given low interest rates on bank deposits and increased consumption. This is also reflected in sluggish deposit growth for the banking system.

Third, and somewhat related to the second point, the rise in prices of precious metals could also be a reason for the increase in CiC, as gold and silver held by households may have got recycled. Some households have used the recent surge in these prices to encash some of their metal holdings, leading to a rise in cash usage across India’s economy. Meanwhile, the cut in GST and income tax rates have acted as incentives for households to spend more.

In this context, the link between gold imports and monetary policy deserves a special mention. Gold imports as a proportion of India’s GDP rose from 2009-10 till 2012-13, when it reached a peak. Currently too, it is at its highest level since 2012-13.

However, back in that four-year period, a Reserve Bank of India (RBI) report in 2013 had shown that currency as a proportion of bank deposits was also rising at a fast pace, indicating an increase in high-value cash transactions for the purchase of gold. That episode of de-financialization was undesirable for India’s financial system; this time, people appear to be using cash to boost consumption.

Fourth, after the withdrawal of the ₹2,000 currency note (as announced by RBI on 19 May 2023), as of end-March 2025, in terms of value, the share of the ₹100 note has increased by 0.8 percentage point to 6.2% and the ₹200 note by 1 percentage point to 4.7% in 2025 from 2023. This is because, for the sake of public convenience, RBI directed banks on 28 April 2025 to increase ₹100/200 denomination notes in ATMs and ensure that 96% of these dispensers dispense these notes by end-March 2026.

Since small notes tend to display greater velocity in their circulation, this directive may have boosted CiC too. However, data from the National Payments Corporation of India on UPI transactions by volume indicates that the average ticket size of a person-to-merchant transaction of less than ₹500 already has a whopping share of 86% in overall UPI transactions. Thus, the substitution of low- denomination notes with UPI is unlikely to happen beyond a point.

There are at least two learnings from the increase in currency with the public.

First, UPI has been an innovation that has leapfrogged other kinds of bank-to-bank digital transactions in India and become a showpiece for the world. Let us not raise hurdles for something that has significantly enhanced the ease of living.

Second, the rise in gold and silver imports but decline in currency as a proportion of deposits indicates increased formalization and a move towards a digital economy.

Perpetual naysayers should note that India’s economy has indeed moved beyond the de-financialization story of a decade ago. Remarkably, RBI now has more operational flexibility in the conduct of monetary policy to complement fiscal policy.

These are the authors’ personal views.

The authors are, respectively, member, 16th Finance Commission and PMEAC, and group chief economic advisor, SBI; and economist and assistant general manager, SBI.