MUMBAI: Despite record high UPI transactions coupled with rising cash withdrawals through ATMs and falling currency-to-GDP ratio, the currency in circulation (CiC) has continued to rise, reaching a new record high of Rs 40 trillion in January, logging an annual growth of 11.1% as against 5.3% a year ago. On net incremental basis, CiC has more than trebled to Rs 2.76 trillion from Rs 88,517 crore.
The numbers show the futility of the note-ban imposed in November 2016 when as much as 87% of the money in circulation across Rs 1000 and Rs 500 rupee notes were banned, with the stated objective of curtailing corruption and curbing cash usage/to promote digital payments.
Amidst the puzzle of high CiC, high UPI transactions, high currency withdrawals through ATMs and declining currency to GDP ratio, the currency with the public (CWP), which is 97.6% of the CiC, also reached an all-time high of Rs 39 trillion in January, up 11.5% vs 5.4% a year ago. Going by current trends, CWP will surpass the post-pandemic FY21 incremental growth of Rs 4.6 trillion, says Soumya Kanti Ghosh, the group chief economic adviser at SBI.
Intriguingly, though the volume of CiC has continued to grow, the cash-to-GDP ratio has declined in recent years to 11% in FY26 from 14.4% in FY21. This can be partly explained by the money demand model. This means that even though the direction of change of currency and GDP may be same, incremental GDP growth is now being less financed by cash and more through UPI, which averages Rs 28 trillion a month.
“The puzzle is why the UPI transaction has surged and CiC has also jumped and so has the overall ATM data, which indicate that the per-month cash withdrawal from ATMs may surpass the long-term average of Rs 2.5 lakh with states like Karnataka, Tamil Nadu, Kerala and Bengal showing an increasing trend in cash withdrawals at ATMs,” says Ghosh.
Explaining the puzzle, he says the trigger was the July 2025 GST notices to small traders and vendors in Karnataka for UPI transactions exceeding the Rs 40-lakh registration threshold between 2022 and 2025. This had signaling impact on other states especially in Tamil Nadu, Kerala, Bengal and Chhattisgarh.
This led to a significant additional increase of Rs 37 crore in ATM withdrawals per month on an average in the affected districts in Karnataka, he says, adding the bottomline is never to disincentivise digital payments.
Another reason is the rising tendency among rural folks to hold cash as people see no incentives to keep money in bank accounts given the record low interest rates on savings deposits and the penchant for consumption. Deposit growth remained sluggish in the current fiscal growing only 10.6% so far.
“Our estimated augmented money demand function using GDP, UPI and other variables reveal demand for money is positively correlated to GDP, though statistically insignificant, and negatively correlated to interest rate. Stated differently, with the rise in GDP, currency demand increases but not in same proportion with UPI and cash substitution. Declining interest rates may have also resulted in higher precautionary demand for money,” he says.
He added that a third reason could be the rise in precious metal prices, which could have resulted in rising currency in circulation through recycling of gold/silver from households.
Households have cashed out some holdings, leading to the rise of CiC. The cut in GST and income taxes has acted as an inventive to boost household consumption. Yet another reason is the withdrawal of Rs 2000 notes (announced on May 19, 2023) and the resultant jump in demand for Rs 500 notes that rose 8.9% in terms of value to 86% and by 3% in terms of volume to 40.9%. In terms of value, the share of Rs 100 notes has increased by 1% to 4.7% and Rs 200 notes by 0.8% to 0.8% in 2025, from 2023.
Forecasting that average monthly cash withdrawals at ATMs are likely to surpass FY24 and FY25 levels, he said this is led by Karnataka, Bengal, Tamil Nadu, Chhattisgarh, Punjab and Jharkhand. This is despite UPI transactions being at an all-time high of Rs 28.3 trillion, which is much higher than the CiC and forms on a monthly basis as much as 70% of total currency in the economy.
On the declining cash to GDP ratio and also the ATM cash withdrawal to GDP ratio, he says this clearly indicates that digital transactions continue to dominate our economy.