Unified Payments Interface (UPI) transactions could account for 90% of total retail digital transactions over the next five years, up from 75.6% at the end of March, the Reserve Bank of India (RBI) said in its monthly bulletin on Friday.

The report shows that UPI recorded 9.4 billion transactions in May, with a 143% year-on-year increase in successful UPI auto-transfer transactions and a 23% year-on-year increase in new task registrations. Moreover, the RBI said that person-to-merchant (P2M) payments have become dominant, accounting for 57% of the total UPI transaction volume.

With the linking of RuPay credit cards with UPI, the value share of P2M transactions is also expected to rise further as the average bill value of credit card purchases is higher than UPI, the report said. The total amount of currency in circulation, the largest component of the reserve currency, fell to 5.3% from 8.3% a year ago, as digital transactions increased and withdrawal of 2,000 notes, the report added.

Credit to term commercial banks fell to 15.4% in early May from a peak of 17.8% in October 2022 due to unfavourable base effects and slower growth in industrial credit, the report on economic conditions said. More importantly, the gap between bank credit and deposits growth rate has narrowed. As banks continue to work hard to narrow the funding gap, the growth rate of deposit mobilisation hit a 27-month high of 11.8%.

In addition, in response to the RBI’s 250 basis points increase in the repo rate since May 2022, banks have adjusted their loan pricing benchmarks, the external benchmark lending rate (EBLR) and the marginal cost of capital loan interest rate (MCLR) upwards. Thus, from May 2022 to April 2023, the bank’s median EBLR and 1-year MCLR increased cumulatively by 250 and 145 basis points, respectively.

“As a result, the weighted average lending rate (WALR) on fresh and outstanding rupee loans increased by 158 bps and 104 bps, respectively. On the deposit side, the weighted average domestic fixed deposit rate (WADTDR) on fresh and outstanding deposits increased by 233 bps and 125 bps, respectively,” it said.

However, WALR for new rupee loans monthly and WADTDR for new deposits fell by 23 bps and 12 bps in April 2023, respectively. In this case, WALR for new rupee loans and WADTDR for new deposits were higher for public sector banks than private banks.

India’s foreign exchange reserves increased by $69.2 billion since October 21, 2022, to $593.7 billion as of June 9, 2023, enough to cover imports for the projected 10 months of FY23, or end-December 2022, 97% of total outstanding external debt. According to the report, as of 2023, India’s foreign exchange reserves will increase by US$31, ranking second among major foreign exchange reserve holders.

Meanwhile, foreign portfolio investment also remained positive for the third straight month in May and reached its highest level in the previous nine months at $5.5 billion. The equity segment dominated FPI flows, accounting for $5 billion. Indian equities attracted the second-highest FPI inflows in May 2023 compared to comparable emerging market peers, the report said, adding that financial services, autos and fast-moving consumer goods (FMCG) attracted the most investments in May.

“Foreign investors invested $1.2 billion in the Indian market as of June 2023 (ended June 16), bringing net inflow to $8.8 billion in FY23-24 compared to a net outflow of $5.9 billion in FY23. India received 48.7% of total EM FPI equity flows in 2023-24 (June 14), while India’s weight in the MSCI Emerging Markets Index was 14.3% (May 31, 2023).