Even as India continues to witness an unprecedented surge in digital payments, a new report by State Bank of India (SBI) Research has highlighted a parallel and seemingly contradictory trend — a sharp rise in cash holdings among individuals, pointing to an increasing 'precautionary motive' that may be driven by heightened uncertainty and amplified by social media narratives.
The Ecowrap report from SBI notes that currency in circulation (CiC) rose by 11.9% in FY25-26 to reach an all-time high of ₹41.6tn (trillion). This marks the highest annual increase since the post-demonetisation period, with an incremental growth of ₹4.4tn. At the same time, digital payments through unified payments interface (UPI) have also surged to record levels, with transaction value rising by 20.6% to ₹314tn and volume increasing by 30% to 241.6bn (billion) transactions during the year, the report says.
The simultaneous rise in both cash and digital payments has been described by the report as a 'cash paradox'. However, SBI Research argues that this is not a contradiction but a sign that India has evolved into a hybrid payments economy where both systems coexist and complement each other.
According to the report, households are increasingly using UPI for small, frequent transactions, particularly those below ₹500, while continuing to hold cash for emergencies, informal dealings, and situations where digital payments may not be feasible. Similarly, small businesses are accepting digital payments but still rely on cash for operational needs such as supplier payments and local transactions.
The most significant insight from the report lies in the widening gap between per capita currency in circulation and per capita withdrawals from automated teller machines (ATM). This gap, which is used to estimate precautionary cash holding, has increased sharply from ₹1,804 in FY23-24 to ₹9,127 in FY25-26, reflecting a five-fold jump in just two years.
The report explains that while ATM withdrawals largely represent transactional use of cash, the excess cash held beyond this level indicates money being kept aside for precautionary purposes. The sharp increase in this gap suggests that individuals are holding more cash than required for routine transactions, SBI says.
The report raises an important question about what is driving this behaviour. It suggests that rising global uncertainties, including geopolitical tensions, may be influencing public sentiment. At the same time, it points to the growing role of social media in amplifying perceived risks. Unlike traditional sources of information, social media can rapidly spread fears and create a sense of systemic risk, even in situations where actual disruption may be limited.
An example cited in the report is the recent concern over liquified petroleum gas (LPG) distribution, where widespread anxiety was observed despite no real supply disruption taking place. Such instances, the report suggests, can reinforce the tendency among households to hold excess cash as a safety measure.
Despite the increase in absolute cash levels, the report clarifies that India is not becoming more cash-dependent. The cash-to-gross domestic product (GDP) ratio has declined from 14.4% in FY20-21 to 12.1% in FY25-26, indicating that the rise in currency is in line with overall economic growth. At the same time, digital transactions as a percentage of GDP continue to rise steadily, reflecting deeper formalisation of the economy, it added.
The report also highlights a skew in currency denominations, with ₹500 notes accounting for about 86% of the total value of currency in circulation. This has prompted the Reserve Bank of India (RBI) to direct banks to ensure greater availability of smaller denominations such as ₹100 and ₹200 through ATMs.
On the digital front, while UPI continues to dominate, the central bank digital currency (e?) remains at a nascent stage. With circulation at around ₹1,016 crore, it accounts for just a negligible share of the total currency in the system. The report emphasises the need for greater awareness and improved usability to boost adoption of the digital rupee.
Looking ahead, SBI Research expects currency in circulation to continue growing in absolute terms but remain stable at around 12% to 12.5% of GDP over the next two years. Meanwhile, UPI transactions are projected to rise further, reaching ₹370tn in FY26-27 and ₹425tn in FY27-28.
India’s payment ecosystem is increasingly shaped by behavioural factors as much as by technology, SBI says, adding that while digital payments are becoming the preferred mode for convenience and efficiency, cash continues to serve as a psychological safety net.
The sharp rise in precautionary cash holding, however, signals that beyond economic fundamentals, public perception, uncertainty, and information flows are playing a crucial role in shaping financial behaviour, the report concludes.
