©Reuters. SUBMIT PHOTO: On June 1, 2017, this illustration depicts an Indian rupee note. Illustration by Thomas White for REUTERS
By Ira Dugal
BENGALURU (Reuters) – India will stop using its highest value currency note, the reserve bank announced on Friday. The 2000 Rupee note, which was introduced into circulation in 2016, will continue to be accepted as legal cash, however residents are urged to deposit or exchange these notes before September 30, 2023.
The decision is comparable to a shocking change made in 2016 when the Narendra Modi-led government overnight removed 86% of the money in circulation from the economy.
However, academics and economic experts believe that this time the migration will be less disruptive because fewer notes will be withdrawn over a longer period of time.
WHY DID THE GOVERNMENT WITHDRAW 2000-RUPEE NOTES?
2000-rupee notes were introduced in 2016 with the intention of quickly replacing the cash in circulation in the Indian economy following demonetisation.
The primary bank has frequently indicated that it wants to reduce the amount of high-value notes in circulation, and over the last four years, it actually stopped producing 2000-rupee notes.
When asked about the decision to remove these notes, the Reserve Bank of India responded, “This denomination is not typically used for deals.”
WHY NOW?
Although the federal government and the reserve bank did not specify the reason for the relocation’s timing, analysts point out that it occurs before the nation’s state and general elections, when money consumption typically increases.
Making such a move before the general elections was a wise one, according to Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. People who have been using these notes as a store of value may run into difficulty, she warned.
WILL THIS HURT ECONOMIC GROWTH?
3.62 trillion Indian rupees ($44.27 billion) of 2000-rupee notes are in circulation. This is related to the 10.8% of currency that is in circulation.
As there are sufficient amounts of smaller-sized notes accessible, this withdrawal won’t cause a significant disruption, according to Nitsure. The extent of digital transactions and e-commerce has actually increased significantly during the last 6-7 years, as well.
According to Yuvika Singhal, an economist at QuantEco Research, small businesses and cash-oriented industries like farming and building and construction may see difficulties soon.
According to Singhal, there may be a spike in discretionary expenditures like gold if those who held these notes choose to use them to make purchases rather than deposit them in checking accounts.
HOW WILL IT AFFECT BANKS?
As a result of the federal government’s request that people deposit the notes or swap them for smaller denominations by September 30, bank deposits will rise. This occurs at a time when bank credit development is lagging behind deposit growth.
According to ICRA Ltd. group head for financial industry rankings Karthik Srinivasan, this will relieve the pressure on deposit rate walkings.
Liquidity in the banking system will also increase.
According to Madhavi Arora, an economist with Emkay Global Financial Services, “since all of the 2000-rupee notes will return in the banking system, we will see a decrease in money in flow which will in turn aid enhance banking system liquidity.”
WHAT ARE THE IMPLICATIONS FOR BOND MARKETS?
According to Srinivasan, increased banking system liquidity and an increase in deposits into banks may indicate that the market’s short-term rate of interest may decline if these funds are used to buy shorter-term federal government assets.
($1 = 81.7800 Indian rupees)