How will withdrawal of ₹2000 banknotes impact interest rates of bank deposits ahead?

The Reserve Bank of India (RBI) has decided to withdraw ₹2000 banknotes and asked citizens to either exchange or deposit this currency denomination at banks. Also, the central bank has advised banks to stop issuing the denomination banknotes with immediate effect. denomination banknotes with immediate effect. The move is expected to improve banks' deposit accretion in the near term and is also likely to ease interest rate hikes.

₹2000 banknote is the highest denomination currency available in India. This banknote was introduced in November 2016 to meet the currency requirement of the economy in an expeditious manner when banknotes like the old ₹500 and ₹1000 were scrapped.

The objective of the ₹2000 banknote was met once banknotes in other denominations became available in adequate quantities. Such as RBI released new notes in ₹20, ₹50, ₹100, and also introduced ₹200 notes after the demonisation move. Accordingly, RBI stopped printing ₹2000 banknotes in 2018-19.

However, it needs to be noted that ₹2000 denomination banknote will still continue to be legal tender.

Read here: Phasing out ₹2000 notes: five things you need to know

Vimal Nadar, Head of Research at Colliers India said, "The withdrawal of ₹2000 rupee-denominated notes is an expected and timely move towards prudent currency management within the realm of maintaining banking & financial discipline."

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.

Latest reserve money data from RBI showed that in total the outstanding currency-in-circulation (CIC) stood at ₹34,88,610 crore as of May 12, 2023.

Karthik Srinivasan, Senior Vice President of Financial Sector Ratings, ICRA expects the withdrawal of ₹2000 banknotes to ease deposits' interest rate hikes.

Srinivasan 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."

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.

Read here: RBI's decision to withdraw ₹2,000 note from circulation evokes hilarious meme fest. See here

In the statement, RBI said, "Deposit into bank accounts can be made in the usual manner, that is, without restrictions and subject to extant instructions and other applicable statutory provisions."

While RBI has 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.

In the case of bank deposits, RBI said, "Deposit of ₹2000 banknotes into accounts maintained with all banks can be made in the usual manner, that is, without restrictions and subject to compliance with extant Know Your Customer (KYC) norms and other applicable Statutory requirements. The banks shall also be required to comply with Cash Transaction Reporting (CTR) and Suspicious Transaction Reporting (STR) requirements, where applicable."

Also, the deposit of ₹2000 banknotes may continue as per the normal banking practice.

Further, RBI said, while crediting the value of ₹2000 notes to Jan Dhan Yojna Accounts / Basic Savings Bank Deposit (BSBD) Accounts, the usual limits will apply mutatis mutandis.

Bank deposit interest rates have jumped since early 2022 due to the aggressive repo rate hike cycle to tackle stubbornly high inflation amidst macroeconomic uncertainties.

In March 2023, the weighted average domestic term deposit rate (WADTDR) on fresh rupee term deposits of Scheduled Commercial Banks increased by 23 bps to 6.48% from 6.25% in February 2023, RBI's data showed.

Also, the weighted average domestic term deposit rate (WADTDR) on outstanding rupee term deposits of SCBs increased by 14 bps from 6.02% in February 2023 to 6.16% in March 2023.

As of May 5, 2023, bank outstanding aggregate deposits stood over ₹184.35 lakh crore. In FY23, the deposit growth rate was 10.4%, improving from 9.7%.

With the withdrawal of ₹2000 banknotes, it is likely to drive the flow of deposits at banks!