How will scrapping of ₹2000 banknotes impact Indian economy, banks?
Analysts and economists do not see a major disruption from withdrawal of ₹2000 banknotes, compared to the impact that was seen in demonisation of old ₹500 and ₹1000 in November 2016. The ₹2000 notes move is also expected to improve banks liquidity system.
Another Indian currency denomination is going to be withdrawn from circulation. This time it is the highest banknote ₹2000 which will not be issued by banks anymore. However, RBI has directed banks to help customers in exchanging their ₹2000 notes or deposits in this denomination. One can't help but remember the so-called demonetisation move that hit the country in November 2016. However, there is a difference though. The withdrawal of ₹2000 banknotes is not expected to be less disruptive than compared the scrapping of 86% of India's currency in circulation over 6 years ago.
According to analysts and economists, Reuters reported that while the government and the central bank did not specify the reason for the timing of the move, however, it comes ahead of state and general elections in the country when cash usage typically spikes.
The move ahead of general elections is seen as a wise decision.
Rupa Rege Nitsure, group chief economist at L&T Finance Holdings told Reuters that “this withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity.” He added, "Also in the past 6-7 years, the scope of digital transactions and e-commerce has expanded significantly."
However, Yuvika Singhal, an economist at QuantEco Research pointed out that small businesses and cash-oriented sectors such as agriculture and construction may face inconvenience in the near term.
Read here: Phasing out ₹2000 notes: five things you need to know
Also, Singhal highlighted that to the extent that people holding these notes chose to make purchases with them rather than deposit them in bank accounts, there could be some spurt in discretionary purchases such as gold
On the impact on banks, Madhavi Arora, an economist at Emkay Global Financial Services stated that since all the 2000-rupee notes will come back in the banking system, we will see a reduction in cash in circulation and that will in turn help improve banking system liquidity.
Meanwhile, Karthik Srinivasan, Senior Vice President of Financial Sector Ratings, at ICRA said, "As witnessed during demonetisation, we expect the deposit accretion of banks could improve marginally in near term. This will ease the pressure on deposit rate hikes and could also result in moderation in short-term interest rates."
Read here: How will withdrawal of ₹2000 banknotes impact interest rates of bank deposits ahead?
Only 10.8% of India's currency in circulation is being withdrawn!
As per RBI's data, about 89% of ₹2000 notes were issued prior to March 2017 and are at the end of their estimated life-span of 4-5 years. The total value of these banknotes in circulation has sharply declined to ₹3.62 lakh crore constituting only 10.8% of notes in circulation as of March 31, 2023 --- from ₹6.73 lakh crore at its peak as on March 31, 2018, which was 37.3% of Notes in Circulation at that time.
RBI has directed the public that they can either deposit ₹2000 banknotes into their bank accounts and/or exchange them for banknotes of other denominations at any bank branch.
However, RBI announced a limit of ₹20,000 on exchanging the ₹2000 banknotes starting from May 23 to September 30, 2023. This is done to avoid disruption of the regular activities of bank branches.
But it also needs to be noted that ₹2000 denomination banknote will still continue to be legal tender even after September 30, 2023.
According to S. Ravi Promoter & Managing Partner, Ravi Rajan & Co. LLP, the 2000 rupee note will continue to be legal tender for normal transactions till 30th September, according to S. Ravi, an expert on the matter. He further explained that there is a limit of exchanging 20,000 rupees at a time, and any amount exceeding that can be deposited in one's bank account as per the set norms.
Regarding the impact on the economy, Ravi stated, "The effects will be temporary, and the Reserve Bank of India providing clear guidelines and FAQs, there is expected to be reduced panic compared to the time of demonetization. The increased adoption of digital transactions and the availability of 100 and 500 rupee denominations will help minimize disruptions for individuals heavily reliant on cash transactions. However, there will be a noticeable reduction in the overall cash circulation."
When asked about the withdrawal of the 2000 rupee notes, Ravi pointed out that the Reserve Bank of India had printed 3.7 billion 2000 rupee notes, amounting to 7.4 trillion rupees thus far. The decision to discontinue printing these notes was anticipated, as RBI had not printed fresh 2000 rupee notes since 2019. It is interesting to note that the detection of 13,604 counterfeit notes of the 2000 rupee denomination during the 2021-22 financial year, rerepresents 54.6% increase from the previous year.
"This decision aligns with the RBI's 'Clean Note Policy' and aims to eliminate low-velocity notes from circulation," Ravi added. He emphasized that such measures are not uncommon, citing the example of the United Kingdom introducing polymer notes in 2016 to enhance security features and reduce counterfeiting.
Regarding the absence of 2000 rupee notes as the largest denomination, Ravi stated, "It will have minimal impact, similar to the situation in the United States, where the largest currency denomination is $100."
In conclusion, the Reserve Bank of India's decision to phase out 2000 rupee notes supports the objectives of the 'Clean Note Policy.' While the economy may experience temporary effects, the availability of smaller denominations and the growing digital transactions landscape are expected to mitigate disruptions caused by the reduction in cash circulation, Ravi added.
(With inputs from Reuters)
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First Published:20 May 2023, 08:57 PM IST
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