India’s Unified Payments Interface (UPI) has become one of the largest real-time payment systems in the world, yet currency with the public (CwP), defined as physical notes and coins held outside the banking system, has risen persistently alongside it. This article examines whether UPI transaction growth exerts an asymmetric effect on CwP using monthly data from August 2016 to March 2026 (116 observations) and the nonlinear autoregressive distributed lag (NARDL) model. The analysis is grounded in the transaction cost theory of payment instrument choice following Whitesell (1989), extended by the dynamic cash inventory model of Alvarez and Lippi (2009), which predicts that contractions in digital payment availability trigger precautionary currency accumulation disproportionately larger than the marginal reduction during normal expansion. The Consumer Price Index and the RBI policy repo rate are included as controls, and additive dummies address structural breaks from demonetization (November 2016) and COVID-19 (March 2020). The bounds test confirms cointegration ( F = 7.507), and the Wald test confirms significant long-run asymmetry ( F = 11.629, p = .001). Positive UPI shocks are associated with rising CwP in the long run, consistent with payment instrument complementarity rather than substitution, whereas negative shocks have a larger opposing effect, reflecting the precautionary motive. The error-correction coefficient of –0.374 indicates an approximately 37% monthly adjustment towards equilibrium. The findings have direct implications for the Reserve Bank of India’s monetary policy framework and India’s physical currency management agenda. JEL Classification: E41, E52, O33, G21, E47
Mahalingam Dhamodharan (Sun,) studied this question.