Data: Despite the Exponential Growth in Digital Transactions, Currency to GDP Ratio Remains High
Sai Krishna Muthyanolla
November 17, 2022
By end of October 2022, RBI data shows that the value of ‘Currency in Circulation’ (CIC) was more than 32 lakh crore rupees. Data from the last 20 years shows a consistent increase in CIC except during demonetization. Even the Currency to GDP Ratio is now higher than levels seen in the years before demonetization.
Central banks generally have the exclusive right to issue local currency notes. The currency in circulation in an economy is controlled by these central banks to meet their economic targets. It is dependent on the demand which is in turn influenced by multiple macroeconomic factors such as economic growth, interest rates, etc. Currency is considered the safest liquid asset to purchase goods and services.
In India, this right to issue currency is vested with the Reserve Bank of India (RBI). The RBI provides weekly data on the ‘Currency in Circulation’ (CIC) in the country in its  Weekly Statistical Supplement under the head, “Reserve Money Components & Sources”. Currency in Circulation (CIC) includes notes in circulation, rupee coins and small coins. Rupee coins and small coins include the ten-rupee coins issued since October 1969, two rupee coins issued since November 1982 and five-rupee coins issued since November 1985.
Value of currency in circulation has grown consistently over the years, except during demonetization
Based on the weekly data, the trend in CIC in the country has been mapped in the chart below. The data is spanning 1,120 weeks or more than 21 years, from 06 July 2001 to 28 October 2022.
On 06 July 2001, the value of CIC was Rs. 2.34 lakh crores which have increased to Rs. 32.11 lakh crores as on 28 October 2022, a growth of over 13 times in about 21 years. The growth has been consistent except in the period of demonetization of over 15 months starting 11 November 2016 before it rose to the pre-November 2016 levels in February 2018. This is due to the unprecedented step of demonetizing the 500 and 1000 rupees notes in circulation announced on 08 November 2016. The value of the currency in circulation fell to Rs. 8.98 lakh crores in January 2017 comparable to the levels in October & November of 2010.
Growth of CIC in 2021-22 below 10% for the third time since 2001
As noted earlier, a consistent increase in the value of CIC is visible over the years, except in 2016-17. For this chart, the value of CIC as of 31 March of each fiscal year or the date nearest to 31 March is considered.
The value of CIC was Rs. 2.51 lakh crores as on 31 March 2002 which has increased to Rs. 31.34 lakh crores as of 31 March 2022.  Between 2001-02 and 2011-12, the annual growth rate was between 12% to 19%. However, in 2012-13, the growth rate dropped to below 12% and further down to 9.24% in 2013-14. Following growth of nearly 15% in 2015-16, the currency in circulation dropped by nearly 20% in 2016-17 due to demonetization. In the subsequent year 2017-18, the growth was 37%. After returning to the pre-demonetization rate of growth in 2018-19 to 2020-21, in 2021-22, the growth rate dropped to 9.8%. Growth of CIC dropped below 10% for the second time in 2021-22, and the third time if the demonetization year is also considered.
Growth of CIC in the seven months of 2022-23 is slow compared to previous years
In the seven months of 2022-23, the value has gone up from Rs. 31.34 lakh crores as of 01 April 2022 to Rs. 32.11 lakh crore rupees as on 28 October 2022, an increase of 2.45%. The growth rate in these seven months in 2019-20, 2020-21, and 2021-22 was 5.6%, 10.5%, and 3.15% respectively. The growth so far in 2022-23 has been lower compared to the earlier years. The high growth in 2020-21 may be due to panic withdrawal & increased demand for currency during the COVID-19 lockdown.
The volume of currency notes in circulation is the number of currency notes that are in circulation. Currently, the Reserve Bank of India issues notes of the denominations – Rs. 2, Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 200, Rs. 500, and Rs. 2000.
As per RBI’s annual report, the volume of currency notes in circulation was 7.35 thousand crores by the end of 2012-13 which increased to 13.05 thousand crores in 2021-22. While the overall volume of notes in circulation has increased by nearly 78% in the last decade, the annual growth rate in 2021-22 has been less than 5%, which is lower compared to previous years, except in 2017-18 when the growth was 2%.
The currency- GDP Ratio has increased
Data indicates that CIC increased year-on-year in terms of both value and volume. The ratio of CIC to Gross Domestic Product (GDP) considers the size of the Indian economy. The CIC is also expected to grow with the economy making the ratio a better indicator to understand the CIC in the economy. In its annual report, RBI has used the GDP figures for 2011-12 base on Current Market Prices. Also, data for 2021-22 is as on 25 March 2022.
In the last decade, the trend in currency to GDP ratio reveals that there has been an overall increase in the last decade, from 12% in 2012-13 to 13.7% in 2021-22. However, the Currency-GDP ratio which was 12.1% by the end of 2015-16 when the demonetization took place, dropped to 8.7% by the end of 2016-17. However, it has improved in the subsequent years, even overtaking the figure of the years before demonetization. In 2020-21, the ratio was 14.4%, up from 12.2% in 2019-20. This is the highest in the decade. By the end of 2021-22, the ratio declined to 13.7%. It remains to be seen if this trend continues in the coming years as economic activities rebound to pre-pandemic levels.
Physical currency continues to be relevant
Despite an exponential rise in online money transfers and digital payments in the last decade, the CIC has also increased even as a share of GDP. As observed in a story by Factly, the average size of online transactions such as RTGS, NEFT, and UPI has declined which shows that people are using online or digital modes of payment for smaller amounts. In other words, despite the widespread use of the digital modes of transactions, physical currency not only continues to be relevant, but the demand also growing as the Cash-GDP ratio shows.