Cash No King, But Still the Casting Vote: Why Currency in Circulation Keeps Rising

The Lift Line

Every month brings a new record for digital payments, and a new record for the quantity of notes Indians are holding. Both records are true, and they are measuring different things.

Why This Editorial Matters for Your Exam

This is the money-and-banking chapter of GS3 arriving as a live policy argument. The weak answer recites Unified Payments Interface volumes and concludes that India is going cashless. The stronger move, which this piece models, is to separate the functions of money and ask which function each instrument has actually captured. Once you do that, the “paradox” dissolves into a testable claim about precautionary demand, denomination structure and the informal economy, and the same analytical frame transfers to demonetisation, to financial inclusion and to central bank digital currency.

GS Paper 3: Indian economy and issues relating to mobilisation of resources; inclusive growth; banking and the financial system; awareness in the field of information technology as it affects governance.

Background and Context

Who issues the currency and under what law. Under Section 22 of the Reserve Bank of India Act, 1934, the Reserve Bank has the sole right to issue bank notes in India, and the Central Government may not issue currency notes. Section 23 requires that the issue be conducted through a separate Issue Department, and Section 24 fixes the permissible denominations, with the highest denomination that may be issued capped at 10,000 rupees. Coins are a different animal: they are issued by the Government of India under the Coinage Act, 2011, and the Reserve Bank only distributes them. Notes are printed at four presses, two owned by the government through the Security Printing and Minting Corporation of India at Nashik and Dewas, and two owned by the Reserve Bank through its subsidiary Bharatiya Reserve Bank Note Mudran Private Limited at Mysuru and Salboni. Distribution runs through a network of currency chests held by banks on the Reserve Bank’s behalf.

What the numbers now say. Currency in circulation rose 11.9 per cent in 2025-26 to a record 41.6 lakh crore rupees, the sharpest increase since 2020-21, with an incremental rise of about 4.4 lakh crore rupees. Against that background, data for the current year has accelerated further: currency in circulation stood at 42.90 lakh crore rupees on 15 August 2026, up 12.4 per cent year on year, against an 8.3 per cent rise at the same point a year earlier. Reserve money on that date was 52.39 lakh crore rupees, so notes and coin are the overwhelming bulk of the monetary base.

And what digital payments say. In 2025-26 the Unified Payments Interface processed about 241.6 billion transactions worth roughly 314 lakh crore rupees, a rise of about 30 per cent in volume and about 21 per cent in value. 55.49 crore users had been onboarded by June 2026. August 2026 set a fresh monthly volume record. So both series are at record highs at the same time, which is exactly the observation the editorial is built on.

Why an official flagged it. Against that background, Reserve Bank Deputy Governor S C Murmu, speaking at a global seminar on cash ecosystems convened by Bank Indonesia in Jakarta on 13 August 2026, described a “cash paradox”: currency in circulation continues to grow at double-digit rates even as cash’s share of individual transactions declines. His point was operational as much as analytical. The Reserve Bank forecasts currency demand on a five-year forward horizon, splitting it into transactional demand (modelled on gross domestic product growth, interest rates, food inflation and the pace of digital adoption) and replacement demand. When the two series decouple, the model loses its anchor and printing and distribution capacity becomes harder to plan. India has roughly 176 billion banknotes in circulation on his account, against about 56 billion United States dollar bills and about 30 billion euro banknotes, and it prints 28 to 30 billion notes a year while disposing of about 21 billion soiled pieces.

The two withdrawals in the background. Demonetisation in November 2016 invalidated the then 500 and 1,000 rupee notes, about 86 per cent of the value of cash in circulation. The 2,000 rupee note introduced afterwards was withdrawn from circulation in May 2023 while remaining legal tender. Against that background, 98.45 per cent of the 3.56 lakh crore rupees outstanding on 19 May 2023 had returned by 31 March 2026, leaving about 5,501 crore rupees, and the notes can now be deposited or exchanged only at the 19 Reserve Bank Issue Offices or sent to them by post. Neither episode produced a durable reduction in the demand for cash.

The Analysis

1. The paradox is a category error, and naming it correctly is the whole answer. Money performs at least three functions: medium of exchange, store of value and unit of account. Digital rails have overwhelmingly captured the first, especially at low ticket sizes, where a payment is a message and settlement is instant. Cash has retained the second. Nothing requires one instrument to hold both. Once the functions are separated, a record for monthly transaction volume and a record for the note stock are not in tension at all; they are measurements of different behaviours, one a flow and the other a stock.

2. The best single piece of evidence is the withdrawal gap, not the headline stock. State Bank of India Research finds the gap between per capita currency in circulation and per capita ATM withdrawals widened to 9,127 rupees in 2025-26 from 1,804 rupees in 2023-24. Read that carefully. If cash were being drawn to be spent, holdings and withdrawals would track each other. A widening wedge means notes are being drawn and kept. That is the textbook precautionary motive: balances held against contingency, encouraged by uncertainty and by the low opportunity cost of holding money. It also implies low velocity for the marginal note, which is why a rising cash stock is compatible with a falling cash share of transactions.

3. Denomination structure quietly proves the storage thesis. At end-March 2026 the 500 rupee note accounted for 35.27 lakh crore rupees, about 86 per cent of the value of banknotes in circulation, but only 41.2 per cent of the volume, with the 10 rupee note next by volume at 16.1 per cent. A payments economy consumes small denominations; a savings economy accumulates large ones. The value is concentrating in the highest circulating denomination even as small notes do the daily work.

4. Cash intensity is falling, and any answer that omits this is one-sided. Currency in circulation as a share of gross domestic product has declined to about 12.1 per cent in 2025-26 from 14.4 per cent in 2020-21 on State Bank of India Research estimates. Per capita currency holding grew at a compound rate of about 9.0 per cent between 2011-12 and 2025-26 against per capita gross domestic product growth of about 9.4 per cent. Cash is growing; the economy is growing marginally faster, and the difference is roughly what the digital rails now carry. So the honest formulation is not “digitalisation has failed” but “digitalisation has changed how India transacts without changing how it stores value”.

5. The central bank digital currency is where the argument bites hardest. By way of background, the e-rupee pilots began in 2022, wholesale on 1 November 2022 and retail on 1 December 2022. It is a direct liability of the Reserve Bank and legal tender, issued in the same denominations as notes and distributed through banks. That is what distinguishes it from the Unified Payments Interface, which is not money at all but a messaging and settlement rail moving commercial bank deposits, and from cryptocurrency, which is nobody’s liability and has no issuer. Yet retail e-rupee in circulation fell about 24 per cent to 771.7 crore rupees at end-March 2026 from 1,016.5 crore rupees a year earlier. Voluntary demand has not materialised, and the response has been to route obligatory flows through it: from February 2026 the government began a CBDC-based digital food coupon pilot in Gujarat’s Ahmedabad, Anand, Valsad and Surat districts, with programmable e-rupee redeemable only for entitled foodgrains at fair price shops, and announced extension to Chandigarh, Puducherry and Dadra and Nagar Haveli and Daman and Diu.

6. Programmability is the genuinely new question, and it cuts both ways. Money that can only be spent on specified goods at specified outlets is not a neutral store of value; it is a voucher with a currency’s name. For the exchequer that is leakage control, and the Public Distribution System serves more than 80 crore beneficiaries, so the leakage stakes are large. For a beneficiary it narrows the option set, adds a device and literacy requirement, and shifts the burden of proving the system works onto the person least able to bear a failure. An answer that sees only one of these two things is incomplete. The defensible design principle is that convertibility into ordinary money should be the default and restriction the justified exception, not the reverse.

7. Free is not costless, and the bill is now visible. The merchant discount rate on Unified Payments Interface and RuPay debit card transactions was set to zero from January 2020, through amendments to the Payment and Settlement Systems Act, 2007 and the Income-tax Act, 1961. The rail has since been financed by budgetary incentive schemes: the Department of Financial Services put cumulative support at about 8,276 crore rupees between 2021-22 and 2024-25. Against that background, the Taxation and Other Laws (Amendment) Bill, 2026 was passed by the Lok Sabha on 6 August 2026 and by the Rajya Sabha on 10 August 2026. It amends Section 10A of the 2007 Act to give the Central Government the power to specify which modes of payment stay inside the no-charge framework. The government has clarified that it imposes no charge on users and that no decision on a merchant discount rate has been taken. The examinable point is structural: a payment rail that is free at the point of use must be paid for somewhere, and a subsidy is not a permanent business model.

8. Where the editorial overreaches, and how to say so. Its inference that the state’s real motive is control rather than efficiency is an interpretation, not a finding, and an answer that adopts it wholesale is asserting intent it cannot evidence. The disciplined version is to argue from design consequences rather than motive: programmable disbursal, whatever its intent, concentrates informational and operational power, and that concentration is a reason for safeguards regardless of who is in office. That formulation is defensible, examinable and does not require you to read minds.

Data and Institutions Vault

Prelims-grade facts:

The law of note issue:

• Section 22, Reserve Bank of India Act, 1934: the Reserve Bank has the sole right to issue bank notes in India.
• Section 23 requires the issue to be conducted through a separate Issue Department of the Bank.
• Section 24 sets permissible denominations, with the highest issuable denomination capped at 10,000 rupees.
• Coins are issued by the Government of India under the Coinage Act, 2011; the Reserve Bank only distributes them.
• Notes are printed at four presses: SPMCIL at Nashik and Dewas, and RBI’s BRBNMPL at Mysuru and Salboni.

Currency in circulation:

• Rose 11.9 per cent in 2025-26 to a record 41.6 lakh crore rupees, the sharpest increase since 2020-21.
• Stood at 42.90 lakh crore rupees on 15 August 2026, up 12.4 per cent year on year against 8.3 per cent a year earlier.
• Reserve money on 15 August 2026 was 52.39 lakh crore rupees.
• Currency as a share of GDP fell to about 12.1 per cent in 2025-26 from 14.4 per cent in 2020-21 (SBI Research).
• Per capita currency holding grew at about 9.0 per cent a year since 2011-12, against per capita GDP growth of about 9.4 per cent.

The storage signature:

• Gap between per capita currency in circulation and per capita ATM withdrawals: 9,127 rupees in 2025-26, from 1,804 rupees in 2023-24.
• The 500 rupee note accounted for 35.27 lakh crore rupees at end-March 2026, about 86 per cent of banknote value.
• By volume the 500 rupee note was 41.2 per cent of notes, followed by the 10 rupee note at 16.1 per cent.
• Deputy Governor S C Murmu put India’s note count at about 176 billion, against about 56 billion dollar bills and 30 billion euro notes.
• India prints 28 to 30 billion notes a year and disposes of about 21 billion soiled pieces.

The 2,000 rupee note, the background:

• Withdrawn from circulation on 19 May 2023, when 3.56 lakh crore rupees was outstanding; it remains legal tender.
• By 31 March 2026, 98.45 per cent had returned, leaving about 5,501 crore rupees outstanding.
• Deposit or exchange is now possible only at the 19 Reserve Bank Issue Offices, including by post.
• Demonetisation of November 2016 invalidated about 86 per cent of the value of cash then in circulation.

Digital rails and the e-rupee:

• UPI processed about 241.6 billion transactions worth roughly 314 lakh crore rupees in 2025-26; 55.49 crore users by June 2026.
• UPI moves commercial bank deposits; it is a messaging and settlement rail, not money.
• The e-rupee is a direct liability of the Reserve Bank and legal tender; its pilots began in 2022, wholesale on 1 November 2022 and retail on 1 December 2022.
• Retail e-rupee in circulation fell to 771.7 crore rupees at end-March 2026 from 1,016.5 crore rupees a year earlier.
• Zero merchant discount rate on UPI and RuPay debit cards from January 2020; budgetary support of about 8,276 crore rupees over 2021-22 to 2024-25.

Inclusion and the subsidy rail:

• CBDC-based digital food coupon pilot launched February 2026 in Ahmedabad, Anand, Valsad and Surat, with programmable e-rupee redeemable at fair price shops.
• Announced extension to Chandigarh, Puducherry and Dadra and Nagar Haveli and Daman and Diu; the PDS serves more than 80 crore beneficiaries.
• PMJDY, launched 28 August 2014, had 59.09 crore accounts and about 3.17 lakh crore rupees of deposits in August 2026.
• Women hold 55.7 per cent of PMJDY accounts, and 77.8 per cent of accounts are in rural and semi-urban areas.
• The Taxation and Other Laws (Amendment) Bill, 2026 amends Section 10A of the Payment and Settlement Systems Act, 2007 as an enabling provision on charges.

⚠️ Watch the trap: Currency in circulation and currency in circulation as a share of gross domestic product move in opposite directions in India. The stock is at a record while the ratio has fallen to roughly 12.1 per cent from 14.4 per cent in 2020-21. A statement that “cash use is rising in India” is therefore true of the stock and false of the intensity, and examiners set statements on exactly this split. A second, related trap: currency in circulation is not currency with the public, which excludes cash held in bank vaults and is about 97.6 per cent of the former.

The Debate

FOR (the persistence of cash is a citizen’s choice worth protecting): Cash settles finally, works when the network does not, costs the payer nothing at the point of use, requires no device, no literacy and no counterparty, and leaves no record that can be repurposed. Those are not defects awaiting correction; they are the properties that make cash the fallback option in a system where every digital alternative depends on infrastructure someone else controls. A payment system with no offline fallback concentrates operational risk in one place, and the option to hold legal tender is a check on that concentration.

AGAINST (the romance of cash understates its costs): Cash is the medium of the untaxed and the untraceable, it imposes real printing, transport, storage and destruction costs on the exchequer, and its anonymity is the same property that makes it useful for evasion and for the financing of crime. Digitalisation has delivered measurable public goods: direct benefit transfer with far less leakage, a transaction history that lets thin-file borrowers access formal credit, and a payments rail that reached 55.49 crore users. The falling cash-to-output ratio shows the policy is working on the measure that matters, and framing traceability as surveillance ignores the legitimate fiscal and anti-money-laundering case.

Balanced verdict: Both hold, on different questions. The evidence supports the claim that cash and digital money are complements with only marginal substitutability rather than rivals in a transition, which is precisely what State Bank of India Research concluded. The policy error to avoid is treating the note stock as the target. The right target is cash intensity, and the right instruments are a digital alternative that is resilient offline, honestly financed and reversible in its restrictions, not one that wins by removing the option to say no.

How to Think About This

When two aggregates move in the same direction and the story says one should have killed the other, run three checks before writing a word. First, are they measuring the same function? A flow of transactions and a stock of holdings are not comparable quantities, and most apparent paradoxes in money and banking dissolve here. Second, is the ratio moving with the level? A record absolute number set against a falling ratio to output is the single most common trap in economy questions, and naming both is what marks an answer as informed. Third, who bears the cost of the transition, and can they refuse it? A reform whose costs land on the person with the least capacity to absorb a failure needs a stronger justification than one whose costs land on an intermediary. Applied here: the functions are different, the ratio is falling while the level rises, and the marginal cost of the next step in digitalisation falls on a foodgrain beneficiary rather than on a bank.

Diagram-in-Words

Takeaway Box

Lift line: Every month brings a new record for digital payments, and a new record for the quantity of notes Indians are holding. Both records are true, and they are measuring different things.

Prelims hooks: Section 22 RBI Act 1934, sole right of note issue; Section 23 Issue Department; Section 24 denominations, highest issuable 10,000 rupees; coins under the Coinage Act 2011; presses at Nashik, Dewas, Mysuru, Salboni; CIC 42.90 lakh crore rupees on 15 August 2026, up 12.4 per cent; CIC to GDP about 12.1 per cent in 2025-26 against 14.4 per cent in 2020-21; 500 rupee note about 86 per cent of banknote value and 41.2 per cent of volume; 2,000 rupee note withdrawn 19 May 2023, 98.45 per cent returned by 31 March 2026, still legal tender; e-rupee wholesale pilot 1 November 2022 and retail pilot 1 December 2022, retail e-rupee 771.7 crore rupees at end-March 2026; zero MDR from January 2020; PMJDY 59.09 crore accounts.

Mains keywords: precautionary demand for money, store of value versus medium of exchange, velocity of money, cash intensity of output, denomination structure, informal economy, programmable money, offline resilience, financial inclusion.

Ethics and interview angle: If a subsidy can be delivered as money that may be spent only on approved goods at approved shops, is that better targeting or a narrowing of the beneficiary’s autonomy, and does the answer change with who the beneficiary is?

PYQ linkage: Connects to past UPSC Mains questions on demonetisation and the digital economy, on financial inclusion and the role of the Reserve Bank, and on the informal sector’s place in the Indian economy.

Sources: The Economic Times, Reserve Bank of India, NPCI, PIB, PRS Legislative Research

Source: Cash No King, But Still the Casting Vote: Why Currency in Circulation Keeps Rising — Ujiyari.com | Free UPSC & State PCS Editorial Analysis