Abstract

This paper throws a light on the nexus between electronic payments in banking and inflation. Payments for goods and services are made by using different electronic payment modes such as credit cards, debit cards, and electronic transfers. There is a perception that large use of electronic channels for payments has the potential to substitute cash for payments in retail transactions and increase velocity of money by both reducing the transaction costs and enhancing the liquidity of financial assets. An increase in the velocity of money would plausibly inflate general prices that have adverse effect on economic system in the country. In this context, we make an attempt to examine the relationship between electronic payments and inflation in India, using cointegration and error correction framework for the period August 2007 to March 2013. We find that both inflation rate and economic growth lead to electronic payments. Particularly, inflation rate contributed in both short-run and long-run relationship, whereas economic growth has long run association with electronic payments. Electronic payment system has potential to expand further and fulfill the need of the people as it is driven by both inflation and economic growth in India.

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