The Currency Demand Paradox: RBI Paper Emphasizes Cybersecurity and Customer Protection

Current Context: The Reserve Bank of India (RBI) has released a paper titled “Cash versus Digital Payment Transactions in India: Decoding the Currency Demand Paradox” which discusses the simultaneous growth of cash and digital payments in India.

• The paper highlights that while digital payments are on the rise, the demand for cash has not diminished.
• The paper explains the ‘currency demand paradox’ in India, where bank notes in circulation are increasing even as digital payments soar.
• This phenomenon is not new or unique to India and has been observed since 2007 for several nations.
• The RBI attributes the currency paradox to factors such as the decline in opportunity costs of holding currency, i.e., interest rates; precautionary holdings amid uncertainty; presence of a large informal economy; and direct benefit transfers by the government, promoting both cash and digital modes.
• The Covid-19 pandemic intensified the currency paradox.

Question:

Q.1 What is the ‘currency demand paradox’ as discussed in the RBI paper?
a. The decrease in digital payments as cash circulation increases.
b. The increase in both digital payments and cash circulation.
c. The decrease in both digital payments and cash circulation.
d. The increase in digital payments as cash circulation decreases.