Currency Circulation Trends Post Demonetisation in India

Since the demonetisation announcement in November 2016, currency with the public in India has more than doubled. The Reserve Bank of India (RBI) data shows that currency in circulation (CIC) rose from Rs 7.8 lakh crore in early 2017 to Rs 37.29 lakh crore by October 2025. Despite this increase, the currency-to-GDP ratio remains below pre-demonetisation levels due to steady economic growth and rising digital payments.

Demonetisation and Its Immediate Impact

On 8 November 2016, Prime Minister Narendra Modi declared the invalidation of Rs 500 and Rs 1,000 notes. These notes accounted for 86% of currency in circulation. The move aimed to curb black money, counterfeit currency, and promote digital payments. The sudden withdrawal caused liquidity shortages, disrupted businesses, and slowed GDP growth by about 1.5%. Many small enterprises shut down due to cash crunch. Long queues at banks and ATMs became common as people rushed to exchange old notes.

Currency with Public – Definition and Growth

Currency with the public is the total cash held by individuals and businesses after subtracting cash held by banks. It includes notes and coins used for transactions. Post demonetisation, the public’s cash holdings initially fell but then increased sharply. By October 2025, cash with the public reached Rs 37.29 lakh crore. The increase was partly due to economic growth and partly due to a cultural preference for cash in India’s large informal sector.

Currency-to-GDP Ratio Trends

The currency-to-GDP ratio measures cash relative to economic output. It was 12.1% before demonetisation, dropped initially, then rose to 14.5% during the pandemic in 2020-21 due to panic cash hoarding. As of 2025, it has stabilised at 11.11%, lower than pre-demonetisation levels. A lower ratio suggests a shift towards digital payments and formal financial channels, aiding monetary policy and inflation control.

International Comparison of Currency Ratios

India’s currency-to-GDP ratio remains higher than many advanced economies. Japan’s ratio ranges from 9-11%, Eurozone 8-10%, China 9.5%, Russia 8.3%, and the US 7.96%. India’s higher ratio reflects a large informal economy, cultural cash preference, and lower card usage. However, digital payment adoption is increasing rapidly, signalling a gradual shift.

Digital Payments and Cash Usage

Despite government efforts to reduce cash dependence, cash remains widely used. The Unified Payments Interface (UPI) has revolutionised digital payments with 185.9 billion transactions in FY25. UPI transactions grew at a compound annual growth rate of 49% between FY23 and FY25. The rise in digital payments is strongest in tier 2 and tier 3 cities, indicating deepening financial inclusion and changing consumer behaviour.

Pandemic Effects on Currency Holding

The Covid-19 pandemic triggered a surge in cash demand during lockdowns in 2020-21. People stocked up on cash for essentials like groceries and medical expenses. This temporary spike pushed the currency-to-GDP ratio to its highest in recent years but has since moderated.

Questions for UPSC:

1. Critically analyse the impact of demonetisation on India’s informal economy and financial inclusion. With suitable examples, discuss the challenges faced in transitioning to a less-cash society.
2. Explain the significance of the currency-to-GDP ratio as an economic indicator. How does this ratio affect monetary policy and inflation control in emerging economies like India?
3. What are the factors driving the rapid adoption of digital payment systems such as the Unified Payments Interface (UPI) in India? Comment on their implications for rural and semi-urban economies.
4. Critically analyse the role of cash in the Indian economy during crises such as the Covid-19 pandemic. How can policy balance between cash reliance and digital payments to ensure economic resilience?

Answer Hints:

1. Critically analyse the impact of demonetisation on India’s informal economy and financial inclusion. With suitable examples, discuss the challenges faced in transitioning to a less-cash society.

1. Demonetisation targeted Rs 500 and Rs 1,000 notes, disrupting cash-dependent informal sector which relies heavily on cash transactions.
2. Liquidity shortages post-demonetisation led to many small businesses shutting down, reducing informal economic activity temporarily.
3. Financial inclusion efforts were hindered as informal workers and rural populations faced difficulties accessing formal banking services.
4. Transition challenges included poor digital infrastructure, low financial literacy, and cultural preference for cash in rural and informal sectors.
5. Examples – Small vendors, daily wage laborers faced cash crunch; slow adoption of digital payments due to lack of smartphones and internet.
6. Despite push for less-cash economy, cash usage rebounded quickly, indicating deep-rooted cash dependency in informal economy.

2. Explain the significance of the currency-to-GDP ratio as an economic indicator. How does this ratio affect monetary policy and inflation control in emerging economies like India?

1. Currency-to-GDP ratio measures cash in circulation relative to economic output, indicating cash dependency of the economy.
2. High ratio suggests reliance on cash, large informal sector, and limited digital financial penetration.
3. Lower ratio reflects greater formalization, digital transactions, and financial inclusion, aiding efficient monetary policy transmission.
4. In India, post-demonetisation ratio dropped but rose during pandemic due to cash hoarding, now stabilizing below pre-2016 levels.
5. Monetary policy effectiveness improves with lower cash dependency as central bank controls money supply and inflation better.
6. Inflation control is smoother with less cash as digital transactions reduce unaccounted cash flows and improve transparency.

3. What are the factors driving the rapid adoption of digital payment systems such as the Unified Payments Interface (UPI) in India? Comment on their implications for rural and semi-urban economies.

1. Government and RBI initiatives promoting digital payments and financial inclusion accelerated UPI adoption.
2. Smartphone penetration and affordable internet in tier 2 and tier 3 cities expanded digital payment reach.
3. UPI’s ease of use, interoperability, and instant transactions boosted user confidence and acceptance.
4. Increased digital literacy and merchant acceptance in rural/semi-urban areas facilitated transition from cash.
5. Implications – Enhances financial inclusion, reduces cash handling risks, promotes transparency, and supports small businesses.
6. Challenges remain including digital divide, cybersecurity risks, and need for continuous infrastructure improvements.

4. Critically analyse the role of cash in the Indian economy during crises such as the Covid-19 pandemic. How can policy balance between cash reliance and digital payments to ensure economic resilience?

1. During Covid-19 lockdown, cash demand surged as people hoarded cash for essentials and medical needs amid uncertainty.
2. Cash provided immediate liquidity for informal workers and small traders unable to access digital means.
3. Digital payments grew but could not fully replace cash due to infrastructure and accessibility gaps in rural areas.
4. Policy balance requires strengthening digital infrastructure while ensuring cash availability for vulnerable populations.
5. Promoting hybrid systems, financial literacy, and targeted subsidies can ease transition without excluding cash-dependent groups.
6. Ensuring resilience involves flexible monetary policy, emergency cash distribution, and robust payment ecosystems.