Currency in circulation reached ₹43.02 lakh crore in May 2026, marking a 12.1% year-on-year increase. This rise suggests a growing precautionary demand for physical cash amid geopolitical tensions in West Asia. The trend, characterized by a preference for mid-value notes, has implications for banking sector liquidity as cash holdings compete with bank deposits.
What Happened
India’s Currency in Circulation (CIC) has seen its most significant growth since the immediate post-pandemic period. According to the latest Reserve Bank of India (RBI) data, CIC grew 12.1% year-on-year as of May 2026, reaching a total of ₹43.02 lakh crore. This is a notable acceleration from ₹38.36 lakh crore recorded in May 2025. This trend reflects a broader shift where households and businesses are keeping larger portions of their wealth in physical cash rather than digital or deposit-based formats, often driven by precautionary motives during periods of heightened global uncertainty, such as the ongoing tensions in West Asia.
Understanding the Demand for Cash
Economists often view a rise in CIC as a sign of precautionary behavior. When global or regional geopolitical situations become unstable, individuals and small businesses may prioritize liquidity, preferring to hold physical money that is immediately accessible. This trend has pushed the CIC-to-GDP ratio to 11.7% for the 2025-26 fiscal year, up from 11.3% in the previous year. While this remains below the pandemic-era peak of 14.4%, it marks a reversal of the gradual decline in cash usage that the economy had witnessed in recent years as digital payments expanded.
The Shift in Denominations
Data on the currency mix provides further insight into how this cash is being used. While high-value notes like the ₹500 bill still dominate, there is a clear trend toward mid-value denominations, which are often used for daily transactions. The share of ₹100 and ₹200 notes in total circulation has increased, while the share of ₹500 notes saw a marginal decline to 85.4%. The ₹2,000 note is now negligible at 0.13% of total circulation, continuing its planned withdrawal from the system. This indicates that the rising demand for cash is largely driven by everyday utility and small-to-medium transaction needs, rather than high-value hoarding.
Why This Matters for Banking Liquidity
For investors, the rise in physical cash has a direct impact on the banking sector. When more money is held as cash by the public, it is effectively removed from the formal banking system, where it would otherwise sit as current or savings account (CASA) deposits. Banks rely on these deposits to lend to borrowers. A prolonged shift toward cash can tighten liquidity in the banking system, potentially increasing the cost of funds for banks. If deposit growth continues to lag behind credit growth—a trend already observed in recent months—banks may face pressure on their net interest margins (NIMs), as they may need to offer higher interest rates to attract depositors.
What Investors Should Watch Next
Investors may monitor the interaction between digital transaction volumes, such as UPI, and physical cash demand. While digital payments continue to hit record highs in terms of transaction value, the simultaneous rise in cash suggests that digital systems are changing how India transacts, but not necessarily how it stores value. Future updates from the RBI on banking system liquidity, deposit growth rates, and the monthly currency-in-circulation reports will be important indicators of whether this precautionary cash trend is stabilizing or intensifying.