Commentator: What India’s decision to scrap the 2000 rupee note means for the economy

MUMBAI, May 20 (Reuters) – India is withdrawal The central bank announced on Friday that the circulation of the highest denomination notes had been suspended. The 2000 rupee notes, which were introduced into circulation in 2016, will remain legal tender, but citizens are required to deposit or redeem these notes by 30 September 2023.

The decision is reminiscent of a shock move in 2016 when the government led by Narenda Modi lifted 86% of the economy’s currency in circulation overnight.

Analysts and economists, however, expect the move to be less disruptive as lower denominations will be withdrawn for a longer period this time.

Why did the government withdraw the 2000 rupee note?

When the 2000 rupee banknote was introduced in 2016, it was intended to replenish the currency in circulation of the Indian economy quickly after banknotes were demolished.

But the central bank has frequently said it wants to reduce the number of denomination notes in circulation, and has stopped printing 2,000 rupee notes in the past four years.

Explaining its decision to withdraw these notes, the Reserve Bank of India said in a correspondence that “this denomination is not normally used for trading.”

Reuters Graphics

why now?

The government and central bank haven’t given a reason for the move, but analysts say it comes ahead of the country’s state and general elections, when cash use typically surges.

“It’s a smart decision to make this move ahead of the general election,” said Rupa Rege Niture, group chief economist at L&T Finance Holdings. “People who have used these bills as a store of value may face inconvenience,” she said.

Will this adversely affect economic growth?

The 2,000 rupee note in circulation is worth 3.62 trillion Indian rupees ($44.27 billion). This corresponds to approximately 10.8% of the currency in circulation.

“There are enough small-volume banknotes available, so this withdrawal won’t cause much confusion,” he said. “Also, in the last six to seven years, the scope of digital trading and e-commerce has expanded significantly.”

But Yubika Singhal, an economist at Quanteco Research, said small businesses and cash-intensive sectors like agriculture and construction could be hit hard in the short term.

Discretionary purchases such as gold could soar as long as people who hold these notes choose to buy them with their notes instead of depositing them in bank accounts, Singhal said.

What are the implications for banks?

Bank deposits will increase as the government asks citizens to deposit banknotes or exchange them for smaller denominations by September 30. This comes at a time when deposit growth has lagged bank credit growth.

Karthik Srinivasan, head of the Financial Sector Ratings Group at rating agency ICRA, said this would ease the pressure on deposit rates to rise.

It will also improve liquidity in the banking system.

“All the 2000 rupee notes will return to the banking system, which will reduce the amount of cash in circulation, which will lead to increased liquidity in the banking system,” said Madhavi Arora, economist at MK Global Financial Services. Stated.

What are the implications for the bond market?

Srinivasan said increased liquidity in the banking system and an influx of deposits to banks could mean that short-term interest rates in the market would fall as these funds would be invested in short-term government bonds. .

(1 dollar = 81.7800 Indian Rupee)

Reported by Ira Dugal.Editing: Jacqueline Wong

Our criteria: Thomson Reuters Trust Principles.

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