The move to demonetise higher denomination currency is a step in the right direction, though there is a need to be vigilant regarding the sources of black economy, SBI said in a research note.

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According to SBI Research, there is excess currency floating in the economy and the number could be as much as Rs 5 lakh crore.

The report noted that such excess cash is neither required nor desirable for overall equilibrium of the economy. Over time, large part of such excess cash becomes unaccounted and adds to the stock of black economy.

"Thus the move to demonetise the higher denomination currency is a step in right direction, though we need to be vigilant regarding the sources of generation of black economy," SBI Research said in a note.

On November 8, Prime Minister Narendra Modi had announced the demonetisation of Rs 500 and Rs 1,000 notes, thereby withdrawing 86% or Rs 14 lakh crore worth currency from circulation.

As per SBI Research, the government should come up with a detailed list of incentives to popularise digital transactions, like completely banning all cash transactions for government services, mandatory installation of PoS machines at merchant outlets and making PAN details mandatory for any cash transaction above a specified limit.

As per the report, there is significant potential for digital payment. The current size of digital banking is around Rs 1.2 lakh crore and this has to reach at least Rs 3 lakh crore.

"To fully utilise the potential residing in the digital channel, banks also need to focus on prepaid payment instruments particularly on mobile wallets. Mobile wallets transactions need to increase from current level of Rs 32 billion to around Rs 100 billion going forward," the report said.