The Puzzle of Cash and UPI Both Touching Record Highs
After the rationalisation of GST rates and amid festive-season demand, India’s currency in circulation (CIC) climbed to record-high levels in late 2025 and early 2026. In January, it touched ₹40 trillion. So far in 2025-26, CIC has increased by ₹2.76 trillion, 3.1 times the rise seen in the same period the previous year.
Intriguingly, even as CIC has jumped, India continues to log record levels of Unified Payments Interface (UPI) transactions. For example, in January, the value of these stood at ₹28 trillion—or 70% of CIC. Simultaneously, the cash-to-GDP ratio has declined in recent years to 11.2% in 2025-26 from 14.4% in pandemic year 2020-21.
This presents a puzzle: how can cash and digital payments both be hitting record highs? If UPI is substituting for cash in day-to-day transactions, why is currency in circulation also surging? The answer, as economists Soumya Kanti Ghosh and Tapas Parida explain, lies in a combination of behavioural, regulatory, and structural factors.
The Long-Term Trend: Substitution
First, it is important to understand the underlying trend. The decline in the cash-to-GDP ratio from 14.4% in 2020-21 to 11.2% in 2025-26 shows that even as economic activity has been expanding at a rapid pace, currency is expanding at a much slower pace. UPI transactions have been substituting for cash, specifically in day-to-day dealings.
This substitution effect is real and significant. UPI has become the default mode of payment for millions of Indians for everything from vegetable purchases to utility bills. Its convenience, speed, and zero-cost nature have made it irresistible.
Yet the absolute level of currency in circulation continues to rise. India’s economy is growing, and more currency is needed to support that growth even if its share of transactions is declining. The cash-to-GDP ratio captures the relative trend; the absolute numbers capture the scale.
The GST Notice Effect
In July, the Karnataka Commercial Taxes Department issued around 18,000 GST notices to small traders and vendors for UPI transactions exceeding the ₹40 lakh registration threshold between 2022 and 2025. This might have acted as a disincentive for UPI use.
The logic is straightforward. Small traders who were operating below the GST registration threshold suddenly found themselves on the radar because their UPI transactions made their turnover visible. The response for many was to shift back to cash for at least some portion of their business, to avoid crossing the threshold and attracting tax liability.
To empirically test the hypothesis that government action pushed consumers and small traders into the shadows of cash, the authors employed a technique akin to a randomized control trial—the intensity-based difference-in-differences framework—on ATM withdrawal data in five states.
The results indicate that in Karnataka, after GST notices were issued in July, the districts that had strong ATM activity prior to that month continued to experience significant increases in ATM withdrawals every month on average relative to the districts that had lower ATM activity before the issuance of GST notices.
Even more striking, the empirical results suggest that the impact was not confined to Karnataka. The effect was also statistically significant for West Bengal and Kerala, suggesting that GST notifications created a perverse signalling impact in other states. Traders across the country, hearing about the Karnataka notices, may have preemptively shifted toward cash to avoid similar scrutiny.
The Rural Cash Dynamic
The motivation to hold cash in 2025-26 has also grown, particularly in rural areas, given low interest rates on bank deposits and increased consumption. This is also reflected in sluggish deposit growth for the banking system.
When deposit rates are low, the opportunity cost of holding cash declines. Why lock money in a bank account earning minimal interest when you might need it for unexpected expenses? For rural households with irregular income streams, cash offers flexibility that deposits do not.
Increased consumption, driven by festive demand and economic recovery, also requires more cash for transactions that are still predominantly cash-based. While UPI has made inroads in rural areas, cash remains king for many types of spending.
The Rise in Prices
The rise in prices of essential commodities also contributes to higher cash demand. When prices increase, more currency is needed to purchase the same quantity of goods. This is a simple mechanical relationship, but it matters.
Inflation, even at moderate levels, steadily increases the nominal amount of currency needed to support economic activity. If prices rise by 5%, the economy needs 5% more currency just to maintain the same real level of transactions.
The Cash Withdrawal Trend
India’s monthly cash withdrawals from ATMs could surpass the long-term average of ₹2.5 trillion, with their numbers in states such as Karnataka, Tamil Nadu, and West Bengal showing an uptrend. This is consistent with the other factors—GST-related shifts, rural cash preference, and rising prices—all pointing toward higher cash usage.
ATM withdrawals are a direct measure of cash demand. When they rise, it means people are choosing to hold more currency. The uptrend in multiple states suggests this is not a localised phenomenon but a broader shift.
The Small Notes Directive
In October 2023, the Reserve Bank of India directed banks to replenish ATMs with higher denomination of ₹500 notes. Since small notes tend to display greater velocity in their circulation, this directive may have boosted CIC too.
However, data from the National Payments Corporation of India on UPI transactions by volume indicates that the average ticket size of a person-to-person transaction of less than ₹500 already has a whopping share of 86% in overall UPI transactions. Thus, the substitution of low-denomination notes with UPI is unlikely to happen beyond a point. UPI has already captured most of the small-value transactions where it makes sense; further gains will be harder.
Two Key Learnings
There are at least two learnings from the increase in currency with the public.
First, UPI has been an innovation that has leapfrogged other kinds of bank-to-bank digital transactions in India and become a showpiece for the world. It is a genuine achievement that has enhanced the ease of living for millions. Policymakers must be careful not to raise hurdles for this success story. The GST notice episode shows how well-intentioned tax enforcement can have unintended consequences for digital adoption.
Second, the rise in gold and silver imports but decline in currency as a proportion of deposits indicates increased formalization and a move towards a digital economy. Perpetual naysayers should note that India’s economy has indeed moved beyond the de-financialization story of a decade ago. Remarkably, the RBI now has more operational flexibility in the conduct of monetary policy to complement fiscal policy.
Conclusion: A Complex Picture
The puzzle of cash and UPI both touching record highs is not really a puzzle once the various factors are unpacked. UPI continues to substitute for cash in day-to-day transactions, driving down the cash-to-GDP ratio. But absolute currency in circulation rises due to economic growth, rural cash preferences, rising prices, and—crucially—policy actions that inadvertently push some transactions back into the cash economy.
The challenge for policymakers is to support the continued growth of digital payments while ensuring that tax enforcement does not create perverse incentives to remain in cash. UPI is a national asset; it must be protected and nurtured. But cash will remain a part of the economy for the foreseeable future, and understanding the dynamics of both is essential for sound policy.
Q&A: Unpacking the Cash and UPI Puzzle
Q1: What is the basic puzzle described in the article?
Currency in circulation (CIC) touched a record high of ₹40 trillion in January 2026, with increases 3.1 times higher than the previous year. Simultaneously, UPI transactions also hit record levels at ₹28 trillion in January. This seems contradictory because UPI is supposed to substitute for cash. The puzzle is how both can be at record highs simultaneously. The answer lies in a combination of economic growth, rural cash preferences, rising prices, and policy actions that inadvertently pushed some transactions back into cash.
Q2: How did GST notices affect UPI usage and cash demand?
In July, the Karnataka Commercial Taxes Department issued around 18,000 GST notices to small traders for UPI transactions exceeding the ₹40 lakh registration threshold. This created a disincentive for UPI use, as traders sought to avoid crossing the threshold and attracting tax liability. Using a difference-in-differences framework, researchers found that districts with strong ATM activity before the notices continued to see significant increases in ATM withdrawals afterward. The effect was also significant in West Bengal and Kerala, suggesting a perverse signalling impact across states.
Q3: What factors are driving increased cash holding in rural areas?
Low interest rates on bank deposits reduce the opportunity cost of holding cash, making it more attractive. Increased consumption, particularly festive-season demand, requires more cash for transactions that remain predominantly cash-based. Rural households with irregular income streams also value the flexibility that cash provides over bank deposits. These factors are reflected in sluggish deposit growth for the banking system even as currency in circulation rises.
Q4: What role does the denomination of currency notes play?
In October 2023, the RBI directed banks to replenish ATMs with higher denomination ₹500 notes. Small notes tend to have greater velocity in circulation, so this directive may have boosted CIC. However, UPI already dominates small-value transactions—86% of person-to-person UPI transactions are for amounts less than ₹500. This suggests that further substitution of low-denomination notes by UPI is unlikely beyond current levels.
Q5: What are the key policy learnings from this analysis?
Two main learnings emerge. First, UPI is a remarkable innovation that has enhanced ease of living and become a global showpiece. Policymakers must avoid creating hurdles that push transactions back into cash, as the GST notice episode inadvertently did. Second, despite the rise in absolute CIC, the declining cash-to-GDP ratio and increased gold/silver imports indicate continued formalization and movement toward a digital economy. The RBI now has greater operational flexibility in monetary policy, a significant improvement from a decade ago.
