In today’s Finshots, we break down India’s cash paradox, i.e., why cash in circulation is rising even as digital payments boom.

The Story

Whenever I pass by an ATM, two thoughts come to mind — first, that I should keep some physical cash for emergencies, and second, who still goes to an ATM anymore?

And the second question isn’t entirely unwarranted. Back in 2016, when demonetisation made the ₹1,000 and ₹500 notes invalid, people rushed to banks and ATMs to deposit their old notes. The overnight shock meant that many businesses wouldn’t accept either note as legal tender for payment.

And because of that, UPI payments took off quickly, with almost every business and store, large and small, setting up Paytm machines and QR codes for the digital payments revolution.

India has become one of the world’s largest digital payments markets, driven by the rapid growth of the Unified Payments Interface (UPI). Billions of transactions take place every month across apps like PhonePe, Google Pay and Paytm, making UPI the dominant retail digital payment system in the country. In fact, UPI accounts for the majority of digital payment volumes in India.

In a world where online payments became the go-to way to pay, physical cash essentially took a back seat for a while. It also doesn’t hurt that most payment platforms today do everything for you — from flight tickets and credit card payments to gas bills and mobile recharges.

But even as digital payments exploded, the amount of physical cash circulating in the economy has continued to grow. For context, currency in circulation has risen sharply from about ₹17.77 lakh crore on demonetisation day in November 2016 to over ₹40 lakh crore by February 2026, according to RBI data.

And an SBI Research report shows just how striking this trend has become. India’s currency in circulation (CiC) has grown by about 11% year-on-year. Nearly 97.6% of this currency is held by the public rather than within the banking system.

In other words, this isn’t money sitting idle in bank vaults. It’s physical currency actively moving through the economy.

Now that might make one think that because people are using more cash, digital payments would slow down. But that’s hardly true. The report estimates that the monthly UPI transaction value is now around ₹28 lakh crore. That means in just one month, UPI processes transactions worth roughly 70% of the total physical currency in the entire economy. So if digital payments are replacing cash, why is the total stock of currency still increasing?

The answer becomes clearer when we look at something economists call the cash-to-GDP ratio. It measures the amount of currency circulating in the economy relative to the size of the economy itself. Between FY21 and FY26, this ratio has actually declined from about 14% to 11%. So while the total amount of cash has increased over the years, cash as a share of India’s GDP (gross domestic product or the total value of goods and services a country produces over a given period) has actually fallen.

Digital payments like UPI are gradually capturing a larger share of everyday transactions, even as the total demand for physical money in the economy continues to expand.

But that still leaves another question. What exactly then, is pushing the absolute demand for cash higher?

The SBI report points to a few reasons.

Let’s start with the first one: GST notices. In July 2025, the Karnataka Commercial Taxes Department issued 18,000 GST notices to vendors and small traders for one reason — their UPI transactions between 2022 and 2025 had crossed the ₹40 lakh registration threshold.

This is because if you run a business and its transaction value exceeds ₹40 lakh (₹20 lakh for services in some states), you must register for GST.

What ended up happening was that regular fruit vendors and stall operators received tax notices worth tens of lakhs. So after these GST notices were issued, ATM withdrawals in the affected districts rose by about ₹37 crore per month, suggesting that some merchants may have shifted back towards cash transactions.

The second reason cash demand hasn’t fallen as much as we might expect has to do with how people behave when interest rates fall.

When banks offer high interest rates, keeping money in a savings account makes sense because your money earns something while it sits there. But when interest rates fall, the difference between holding money in the bank and holding it as cash becomes much smaller.

And when that happens, people simply don’t mind keeping some extra cash on hand.

This may have increased what economists call precautionary cash balances or money that households keep aside just in case. It could be for emergencies, unexpected expenses, or simply the comfort of having some physical cash available.

So even as digital payments take over everyday transactions, people may still prefer holding a bit more cash than before.

The third reason is the surge in gold prices. When gold prices rise sharply, households often unlock some of that wealth — either by selling old jewellery or borrowing against it. In India, this channel is significant because households hold enormous quantities of gold as a store of wealth.

When prices surge, that wealth becomes easier to monetise. In fact, loans backed by gold have surged sharply in the past year. Outstanding gold-backed loans rose from about ₹1.16 lakh crore in May 2024 to ₹2.51 lakh crore in May 2025, more than doubling in a year.

So households can sell jewellery or pledge it as collateral to access cash. That’s money that eventually finds its way back into consumption and circulation.

The final piece of the puzzle lies in the type of transactions UPI has replaced. Most digital payments today are for small everyday purchases like groceries, tea, auto rides or quick retail payments. In fact, SBI’s analysis shows that in terms of value, nearly 86% of person-to-merchant UPI transactions are below ₹500.

That means UPI is essentially competing with the small-denomination notes that once dominated these everyday payments — the ₹5, ₹10, ₹20, ₹50, ₹100 and ₹200 notes.

But the ₹500 note still dominates the cash economy. So even when the RBI withdrew the ₹2,000 note in 2023, most of that value simply returned to circulation in the form of ₹500 notes rather than disappearing altogether. After becoming the highest denomination in circulation, the ₹500 note increased by 8.9% in value to account for about 86% of the total and by 3.0% in volume to over 40%.

And that may explain India’s cash paradox. Digital payments are rapidly taking over everyday transactions, but cash continues to play other roles — as a store of value, a precautionary buffer, and a convenient way to transact in parts of the economy that remain outside the digital ecosystem.

So the future of payments in India may not be about eliminating cash altogether. It may simply be about learning to live with two systems growing side by side.

Which brings us back to that question we have every time we walk past an ATM. If everyone is paying digitally, who still withdraws cash?

The answer, it turns out, is still quite a lot of us.

Until then…

If this story helped you understand why cash is still growing, share it with a friend, family member or even strangers over WhatsApp, LinkedIn and X.

🚨Term Life Insurance Prices are About to INCREASE!

A prominent insurer is set to raise their term insurance rates in the next few weeks. This means if you don’t secure a term plan now, your premiums could significantly go up!

Here’s why this matters: When you purchase a term life insurance policy, you pay a premium or a small fee each year to protect against financial risks. In the unfortunate event of your passing, the insurance company pays out a substantial sum to your family or loved ones.

The best part? By buying early, you can lock in your premiums, ensuring they're not affected by any future rate hikes.

If you've been considering a term plan, now is the perfect time to act. To assist you in the process, our advisory team at Ditto is here to help. Click on the link here to book a FREE call with our IRDAI-certified advisors.