Digital Payments Soar, Yet RBI Flags ‘Cash Paradox’ as Currency Demand Stays Strong

Deputy Governor Says Rising Cash Circulation Despite UPI Boom Makes Future Forecasting Harder; Rural and Small Business Demand Remains Robust

India’s digital payments revolution continues to gather pace, but the demand for physical cash is refusing to fade. Reserve Bank of India (RBI) Deputy Governor Shirish Chandra Murmu has highlighted a growing “cash paradox” currency in circulation is still rising at double-digit rates even as the share of cash in individual transactions declines sharply due to the rapid adoption of digital modes.

The Cash Paradox Explained

Speaking at a global cash management discussion organised by Bank Indonesia in Jakarta, Murmu noted that while digital payments have transformed the way Indians transact, absolute demand for banknotes has not reduced. “Currency in circulation continues to grow at double-digit rates even as cash’s share of individual transactions declines, thanks to growing digital payment adoption,” he said.

This divergence is making it increasingly difficult for the central bank to accurately forecast future cash requirements, complicating planning for note production, distribution and replacement capacity.

Scale of India’s Cash Ecosystem

India currently has around 176 billion banknotes in circulation. The RBI produces between 28 billion and 30 billion notes every year across six denominations and withdraws roughly 21 billion unfit notes annually. By comparison, the United States has about 56 billion dollar bills and the eurozone around 30 billion euro notes in circulation, underscoring the massive scale of India’s currency operations.

Why Cash Demand Persists

Murmu pointed to structural reasons behind the continued preference for cash. Demand remains particularly strong in rural and semi-urban areas, among low-income groups, older populations and small businesses. For many of these segments, cash continues to serve multiple purposes as a medium of exchange, a store of value and a preferred mode for informal or day-to-day transactions.

Even as UPI and other digital platforms handle an ever-larger share of formal payments, the overall stock of currency keeps expanding. Factors such as GDP growth, interest rates, food inflation and uneven digital penetration across regions further complicate demand projections.

Challenges for the Central Bank

The RBI uses a five-year forward assessment to estimate currency needs, taking into account both transactional demand and replacement demand. However, the simultaneous rise in digital adoption and cash holdings has introduced greater uncertainty into these models. Murmu acknowledged that the central bank is still refining its approach to better capture this evolving relationship.

The large volume of lower-denomination notes in India’s currency mix also adds to logistical complexity, requiring extensive printing, storage, transportation and soiled-note processing infrastructure.

Broader Implications

The persistence of cash alongside booming digital payments reflects the dual nature of India’s economy. While urban and formal sectors have embraced UPI, QR codes and other digital tools at remarkable speed, significant sections of the population continue to rely on physical currency. This reality has implications for financial inclusion strategies, currency management costs and the design of future payment systems.

Policymakers face the task of supporting digital growth without disrupting the cash ecosystem that still serves millions. Efforts to improve note durability, explore alternative materials such as polymer, and strengthen last-mile distribution remain important.

Outlook

India’s payments landscape is likely to remain hybrid for the foreseeable future. Digital volumes will continue to surge, driven by convenience, policy support and expanding smartphone penetration. At the same time, cash is expected to retain a meaningful role, especially in certain geographies and demographic groups.

For the RBI, the key challenge will be improving the accuracy of cash demand forecasts in this complex environment. Better data, refined modelling techniques and closer monitoring of regional and segment-wise trends will be essential to ensure adequate supply without excessive printing.

The “cash paradox” serves as a reminder that technological progress and behavioural change do not always move in perfect sync. India’s experience shows that even in one of the world’s fastest-growing digital payments markets, physical currency retains a stubborn and significant place in everyday economic life.