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Relevance: GS-III (Indian Economy & Monetary Policy) | Source: The Indian Express

The Context: Ten years ago, on November 8, 2016, the government cancelled 86% of India’s currency notes (₹500 and ₹1,000) overnight to fight black money and push digital payments. Today, even though UPI has made India a global leader in digital transactions, physical cash held by the public has more than doubled – showing that cash and digital payments are growing side by side.

1. The Numbers: The Great Cash Comeback

  • Cash Rebound (Up 137%): Currency with the public fell from ₹17.97 lakh crore in November 2016 to ₹7.8 lakh crore in January 2017. Today, it has crossed ₹42.55 lakh crore – nearly 137% higher than before demonetisation.
  • Currency-to-GDP Ratio: Cash as a share of the economy stands at 12.1% in FY26 – almost identical to its March 2016 level (after briefly touching 14.4% during the 2020–21 COVID-19 lockdown when families saved cash for safety).
  • Global Comparison: India’s 12.1% cash-to-GDP ratio is completely normal for a fast-growing economy, sitting right between China (10.2%) and Japan (over 16%).

2. Core Monetary Concepts

  • Currency in Circulation (CIC): Total paper notes and coins issued by the RBI and the Government of India. It is the largest part of Reserve Money (M0).
  • Currency with the Public: Calculated as CIC minus cash lying inside bank vaults. Along with demand deposits in banks, it forms Narrow Money (M1) – the most liquid money in the economy.
  • The Cash Paradox: UPI mostly replaced small daily cash payments, but people still prefer cash as a safe store of value, for rural and informal wages, and for privacy.

UPSC Value Box: Legal & Institutional Frameworks
Section 26(2), RBI Act 1934 Allows the Central Government (on the RBI Central Board’s recommendation) to declare that any series of bank notes is no longer legal tender. Upheld 4:1 by the Supreme Court in Vivek Narayan Sharma v. Union of India (2023).
NPCI & UPI Boom Set up by the RBI and IBA under the Payment and Settlement Systems Act, 2007, the National Payments Corporation of India (NPCI) launched UPI in 2016, making India the world’s top real-time digital payments hub.
Clean Note Policy (₹2,000 Note) Under Section 27 of the RBI Act, the RBI pulled ₹2,000 notes out of circulation in May 2023. Unlike 2016, these notes were not demonetised—they remain valid legal tender.

Practice MCQ

Q. Consider the following statements regarding currency dynamics and monetary metrics in India:

  1. “Currency with the public” is calculated by the Reserve Bank of India by subtracting cash held in bank vaults from the total Currency in Circulation.
  2. Section 26(2) of the Reserve Bank of India Act, 1934 empowers the Central Government, on the recommendation of the RBI’s Central Board, to declare that any series of bank notes shall cease to be legal tender.

Which of the statements given above is/are correct?

(a) 1 only     (b) 2 only     (c) Both 1 and 2     (d) Neither 1 nor 2

Answer: (c) Both 1 and 2
Hint: Both statements are correct. Currency with the Public = Currency in Circulation (CIC) minus cash held by banks. Under Section 26(2) of the RBI Act, 1934, the Central Government can demonetise any series of bank notes—a power upheld by a 5-judge Supreme Court Constitution Bench in 2023.
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