What RBI's Withdrawal Of Rs 2,000 Notes Mean For Economy, Equity Market And Banks

According to analysts and economists, the withdrawal of the Rs 2,000 currency note is expected to be less disruptive as a lower value of notes is being withdrawn over a longer period of time.

Finance Secretary T V Somanathan said that there will be no impact on economy as these notes are not largely used for transactional purposes anyway.

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In an unexpected move, the Reserve Bank of India (RBI) on Friday announced the withdrawal of Rs 2,000 currency notes from circulation. The 2000-rupee note, which was introduced into circulation in 2016, will continue to be recognised as legal tender. However, the RBI has requested people deposit or exchange these notes by September 30, 2023. 

This move differs from the sudden demonetisation event in November 2016, when the old Rs 500 and Rs 1,000 notes were rendered invalid overnight. According to analysts and economists, the withdrawal of the Rs 2,000 currency note is expected to be less disruptive as a lower value of notes is being withdrawn over a longer period of time, reported news agency Reuters. 

According to data released by the Reserve Bank of India (RBI), the total value of Rs 2,000 notes in circulation has decreased to 10.8 per cent of the total as of March 31, 2023. The RBI on May 19 said that approximately 89 per cent of the Rs 2,000 denomination banknotes were issued prior to March 2017 and have now reached the end of their estimated lifespan of 4-5 years.

The overall value of these banknotes in circulation has declined from its peak of Rs 6.73 lakh crore on March 31, 2018, accounting for 37.3 per cent of the total notes in circulation, to Rs 3.62 lakh crore, representing only 10.8 per cent of the notes in circulation as of March 31, 2023. 

"This denomination is not commonly used for transactions," the Reserve Bank said. 

 Rs 2,000 Note Withdrawal: How It Impacts Economy 

In an interview with Bussines Standard, Finance Secretary T V Somanathan said that there will be no impact on the economy as these notes are not largely used for transactional purposes anyway.

"It has outlived its purpose, especially with the growth of digital transactions at payment systems. It was introduced for a quick circulation after the [2016] demonetisation, and it has served its purpose. Now there is no need to have a high-denomination note keeping in view the spread of electronic transactions," he said. 

 

On the other hand, Senior Congress leader P Chidambaram, who has served as Union Minister of Finance four times, said, "As expected, the government/RBI have withdrawn the Rs 2,000 note and given time until September 30 to exchange the notes. The Rs 2,000 note is hardly a popular medium of exchange. We said this in November 2016 and we have been proved correct."

 

"I shall not be surprised if the government/RBI re-introduced the Rs 1,000 note as well. Demonetisation has come full circle! It was used only by people to keep their black money, temporarily!" he added in a tweet.

 

 

Rupa Rege Nitsure, group chief economist at L&T Finance Holdings told Reuters, "Making such a move ahead of the general elections is a wise decision. People who have been using these notes as a store of value may face inconvenience. This withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity."

On the other hand, Yuvika Singhal an economist at Quantico Research told the news agency that small businesses and cash-oriented sectors such as agriculture and construction could see inconvenience in the near term. 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. 

 Rs 2,000 Note Withdrawal: How It Impacts Share Markets

Kranthi Bathini, Equity Strategist, WealthMills Securities told Bussines Today, “The move will not impact the market and economy because the circulation of currency is already less. At the same time, the digitalisation payment system is also very strong in the country.”

According to the Reuters report, Karthik Srinivasan, group head of financial sector ratings at rating agency ICRA Ltd. said that improved banking system liquidity and an inflow of deposits into banks could mean that short-term interest rates in the market drop as these funds get invested in shorter-term government securities. 

 Rs 2,000 Note Withdrawal: How It Impacts Banks

According to the report by Reuters, RBI's directive to deposit or exchange the Rs 2,000 notes by September 30 is expected to result in an increase in bank deposits. This development is significant as deposit growth has been trailing behind bank credit growth.

According to Srinivasan, this will alleviate the pressure for hikes in deposit rates. The improved deposit inflow will positively impact banking system liquidity.

Madhavi Arora, an economist at Emkay Global Financial Services, told the news agency that since all the Rs 2,000 notes will be returned to the banking system, there will be a reduction in cash circulation. Consequently, this will contribute to an enhancement in banking system liquidity.