Cash preference in India: Empirical methods and findings

Sasanka Sekhar Maiti, Nandalaya Hemachandra and Anil Kumar Sharma

Journal of Payments Strategy & Systems, 2019, vol. 13, issue 2, 165-176

Abstract: This paper proposes an indicator that provides a proxy measure of cash preference in India, based on credit and debit card transactions undertaken at automated teller machines and point-of-sale terminals. This indicator demonstrates that the customers of public and private sector banks show a preference for cash transactions over non-cash transactions, while the customers of foreign banks prefer non-cash transactions over cash transactions. The estimated cash preference ratio shows a declining trend over time, in line with the Reserve Bank of India’s progress towards a less cash-dependent economy. The empirical results reveal a sharp decline in cash preference during the period of demonetisation; however, cash preference marginally increased during the post-demonetisation period. The study also finds that customers of public sector banks have the highest cash preference, followed by the customers of private sector banks. The authors propose the introduction of an oversight mechanism to identify the root causes of high cash preference, and the provision of remedial measures, such as investment in the infrastructure to support non-cash transactions and educating customers about the benefits of a cashless economy.

Keywords: payment system; automated teller machine; point of sale; cash preference; structural change; oversight framework (search for similar items in EconPapers)
JEL-codes: E5 G2 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:aza:jpss00:y:2019:v:13:i:2:p:165-176

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