On 19th May 2023, RBI decided to withdraw the Rs 2000 denomination banknotes from circulation as a part of currency management w.e.f. 22nd May.
In value term, the share of 2000 denomination notes (Rs 3.62 lakh crore) was at 10.8% as on Mar’23. Basis the RBI Governor’s statement (on 08 June), around 1.8 lakh crore of Rs 2000-rupee notes have come back to the system. Of this, around 85%/ Rs 1.5 lakh crores have come as deposits and the rest are exchanged for other smaller denominations.
In accounting terms, as the RBI generates liabilities/ currency in circulation, it must be matched by creation of assets/ Open Market Operations of purchase/ sale of Government securities of the same magnitude. Thus, it is most likely that the entire amount will come back into the system. However, the seasonally adjusted decline in currency in circulation during the same period is only around Rs 90,000 crore.
Even as Rs 1.5 lakh crore of Rs 2000-rupee notes has been deposited at the banks, this implies that the amount spent/ exchanged by people over the counter is ~ Rs 60,000 crore (Rs 1.5 lakh crores net of Rs 90,000 crore decline in currency in circulation ~Rs 60,000 crores). This could also result in a bank deposit boost, repayment of loans boost, consumption boost, RBI retail CBDC boost and a possible GDP boost.
The ‘precision strike’ by RBI hits the right notes on multiple counts, taking pressure off substantially from near war-like quest for deposits from banking system while also smoothening the bias for higher interest rates going forward. Additionally, the move effectively anchors the surge in incremental C/D ratio, nearing pre-pandemic levels, by filling the coffers and keeping banks ready to meet funding needs from diverse sectors.
The short-term rates (CPs) should ease from upper crest, in alignment with smoothening of benchmark yields while CDs raising by banks to fund the credit/ investment demands should also find a rational footing.
With overseas markets remaining choppy (further consolidation of mid and small size banks in AEs looks certain going ahead with elevated Fed rates distorting the flimsy equilibrium of yesteryears), Indian banks should get more elbow room to meet the demands from corporates to fund their expansion plans through a mix of credit facilities.
Deposit in the banking system through corporates is witnessing smart traction, majorly through Bulk Deposits, as better returns with liquidity and safety has made bank deposits a favourite alternative for corporates from diverse strata including PSUs and NBFCs.
RBI’s retail CBDC project (E-RUPI) should be an ultimate beneficiary of this tactical move as it transitions from a beta-testing phase in the CUG (Close User Group) to hit the streets (going by the preparedness of stakeholder banks to on-board select merchants and retail individuals in the real-time payment landscape through their dedicated apps). The absence of higher denomination note should propel faster adoption of E-RUPI for merchant transactions, concurrent with physical fiat currency.
Around Rs 55,000 crore could be withdrawn by public from the saving bank deposits to be made cumulatively through Rs 2000 notes. This should give consumption boost along with increasing the velocity of money Considering the MPC of this Rs 55,000 crore at 0.7, we believe that the Private Final Consumption Expenditure (PFCE) might increase by Rs 1.83 lakh crore through the multiplier effect. Considering that ratio of PFCE to GDP at constant prices is around 58%, SBI Research expects Q1 FY24 GDP growth at ~ 8.1% with an upward bias due to the impact of this Rs 2000 note withdrawal event. This reinforces the projection that FY24 GDP could be higher than 6.5%, per the RBI estimate.
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