RBI should keep watch of India’s cashless tryst

Context: App-based payments are set for rapid expansion now that WhatsApp Pay has joined the fray online. If a market boom ensues, it might even have implications for monetary policy.

Opportunities for Digital Payments in India:

• Huge user base: WhatsApp has an overall domestic user base of some 400 million.

• Government support: Payment apps can transfer money among themselves, thanks to NPCI’s Unified Payments Interface (UPI), an enabler of inter-bank transfers.

• UPI set a record of over 2 billion transactions, worth nearly ?3.9 trillion.

Challenges to Digital Payments in India:

• Regulatory Hurdles: NPCI has capped the volume of transactions by such apps at 30% of UPI’s total, which has the following adverse impacts:

• Existing players like Phone Pe and Google Pay are being forced to lose market share by 2023 due to mandatory capping, in order to accommodate WhatsApp.
• It distorts incentives to reach out and penetrate the Indian market: These apps may prefer to skim the cream of high-value transfers instead.

• May lead to a decrease in the” velocity of money”: which is interpreted as how many times the average rupee changes hands over the span of a year.

• The declining velocity of money: In 2016-17 before demonetization, we had a national income of Rs5.4 for every rupee held in liquid form, which reduced to below Rs 5 in 2019-20.

• A cashless boom in the years ahead could conceivably impact our conduct of monetary policy.

• Rising circulation of currency: The bottom fact remains is that Cash is not obsolete as Cash has increased by  50%, four years later.

• Risk of inflation: If e-money were to zoom ahead from here onwards, then the rupee itself might silently gain pace.

Conclusion: Inflation may need to be tracked, just in case a point arises after which we have too much money chasing too few goods and services.