Investigating the Impact of Fintech on Money Supply: A Case of the Indian Economy

Abstract

The study’s primary goal is to determine how the increase in digital transactions has affected narrow money, also known as M1, which serves as a proxy for nominal GDP and national income. The National Electronic Funds Transfer (NEFT), the Immediate Payment System (IMPS), the Unified Payment Interface (UPI) and Mobile Banking (MB) are all used in the study as proxies for digital payment systems. In contrast, M1, or narrow money, is used as a proxy for the money supply in India from July 2016 to August 2022. Every month, the Reserve Bank of India database has served as the source of the statistics. The effect of digital transactions on M1 has been studied using the sophisticated econometric approach known as the ARDL (autoregressive distributed lag model). The presence of cointegration between the variables is further demonstrated by the long-run cointegration bound test. The findings of the diagnostic tests show that serial correlation and heteroskedasticity are absent. According to the results of the CUSUMSQ (CUSUM-square) and Jarque–Bera tests, the model is stable and normally distributed. Digital payments are statistically significant and positively correlated with the money supply, according to the error correction model test. The long-run equation results also demonstrate that the digital payments system might have a long-term positive or negative correlation with M1. Since every other independent variable, excluding IMPS, is positively connected to the money supply and IMPS is negatively related, the two are inversely related. The money supply will shrink as IMPS transaction volume rises, but this will have minimal substitution impact on the M1 monetary aggregate. Thus, the study’s findings imply that there might be several changes to the money supply or monetary aggregates, which are crucial tools of monetary policy, due to the impudent rise of financial innovations or additional fintech opportunities. Because of this, the demand for money function may become unstable, making it difficult for policymakers to put their plans into action.