India's currency in circulation fell for a second week in a row after the central bank removed the largest denomination note in May, urging citizens to deposit it with different banks in an effort to support lender deposits.
The amount of money in circulation decreased by 272.8 billion rupees ($3.30 billion) during the week ending June 2, according to figures released late on Wednesday by the Reserve Bank of India (RBI). In the week ending May 26, it decreased by 364.9 billion rupees.
The RBI said on May 19 that it would begin removing notes with a face value of 2,000 rupees from circulation. Between May 23 and September 30, people in having those notes were required to deposit them in their respective bank accounts or exchange them for smaller denominations.
According to Reuters, almost three-fourths of Indians have so far chosen to deposit the notes into bank accounts rather than exchange them for currency with smaller denominations.
While the entire amount of notes deposited or traded to date is not yet publicly known, according to six public and private sector bankers contacted by Reuters, more than 80% of the notes they received had been placed into accounts with the remaining 20% having been exchanged.
The increase in these deposits has helped the banking system's liquidity excess, which has remained above two trillion rupees since the beginning of June. As a result, the central bank has been forced to undertake reverse repos for four consecutive sessions.
The market has begun to anticipate that the RBI may choose overnight variable rate reverse repos as banks are reluctant to mark much money for longer duration reverse repos.
"It can be safely assumed that the banking system liquidity would increase by one trillion rupees to two trillion rupees gradually over the next few months," said Sandeep Bagla, chief executive officer at Trust Mutual Fund.
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