Aim – Digital Payment and Causality – Inflation and Gold Prices: Evidence from India’s Demonetization Policy

Examining the Impact of India's Demonetization Policy on Digital Payment and Inflation

Abstract

We investigated one of key objectives of India’s demonetization policy, – the evolution of digital payment and its causality on inflation and gold-prices, which made Rs. 500 and 1000 denomination notes illegal in the circulation on 08 November 2016 onwards. The aim – digital payment, conceived to switching from cash-driven economy to cashless-economy, was studied by analyzing the various modes of the digital payments and volume transacted for the duration of October 2016 - November 2017. Digital payments gateway studied here includes Real-Time Gross Settlement (RTGS) including - Customer Transactions and Interbank Transactions CCIL Operated Systems – including Collateralized Borrowing and Lending Obligation (CBLO), Govt. Securities Clearing, Forex Clearing Paper Clearing including - Cheque Truncation System (CTS), MICR Clearing, Non-MICR Clearing Retail Electronic Clearing including - Electronic Clearing Service (ECS), National Electronic Funds Transfer (NEFT), Immediate Payment Service (IMPS), National Automated Clearing House (NACH) Cards including - Credit Cards, Debit Cards Prepaid Payment Instruments (PPIs) including - m-Wallet, PPI Cards, Paper Vouchers and finally Mobile Banking. The causality was studied on the monthly inflation rate and on the gold-prices because in absence of new currency notes post-demonetization, prices of common household commodities are expected to surge and common people will explore alternative avenues of arranging money to meet the immediate needs like marriage, business, medical emergency, education fees etc. by selling the reserved gold. Thus, these indicators will allow to access post-demonetization scenario, and were tested in this paper.