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People holding cash for emergency rather than transactions: SBI Report – Economic Times

People may be holding as much as Rs. 3.3 lakh crores in cash for emergency purposes due to the Covid related dislocation in their income expectations, estimates SBI. The rise in cash to GDP ratio may be misleading due to this factor. If one adjusts for the emergency, the cash to GDP ratio may be lower than the pre-demonetisation level.

“Our estimate also shows that because of the pandemic people may have been holding as much as Rs 3.3 lakh crores in cash for precautionary motive beginning FY21” said SBI Research team’s report titled “A Guide to Formalisation of Economy since FY18”.It adds that “If we adjust for such currency transactions, the currency to GDP ratio for pure payment purposes may have actually declined in FY21 compared to earlier years.”

The formalization efforts are bearing major fruit in terms of currency /GDP ratio. The research report by the country’s largest lender estimates that without pandemic GDP collapse, CIC/GDP ratio would have been 12.7% in FY21, as against 12.4% in FY11.

Indian consumers are migrating to high end technology platforms like UPI- Unified payments interface- that does not require the intervention of a POS or a point of sale machine and factor authentications: UPI transactions have jumped 70 times in last 4 years.

Latest currency in circulation data reveals that it has remained constant over the previous year even as record purchases happened during Diwali at Rs 1.25 lakh crores. The latest RBI data show that currency in circulation rose Rs 43,892 crore during the festival weekend, almost the same as the previous year’s Diwali week when the festival spends were lacklustre. “This happened for the first time since 2014” said S K Ghosh, SBI’s group chief economic advisor, who has authored the report.

“Indian consumers now prefer convenience in payments through the click of a button. The vast quantity of information that is produced as a passive by-product of the use of such UPI transactions holds a great promise as a transformative resource for real time policy and evidence based policy making” Ghosh said.

As this would need use of huge swaths of data and use of artificial intellegence by banks, the report recommends scaling up of large investment in cloud platforms by banks. “This might also necessitate regulatory interventions of both Central Banks and Government so that database can be harnessed and stored and also used for real time policy making” Ghosh said.