The move, which requires citizens to deposit or exchange the notes by September 30, 2023, aims to reduce the circulation of high-value notes. Here are some key points regarding its impact:
Reason for Withdrawal :
The introduction of the 2000-rupee notes in 2016 was intended to quickly replenish the currency in circulation after demonetization. However, the Reserve Bank of India (RBI) has expressed a desire to reduce the circulation of high-value notes. The RBI stated that the 2000-rupee note is not commonly used for transactions.
Unlike the shock demonetization in 2016 when a significant portion of currency was withdrawn overnight, this time the withdrawal of the ₹ 2000 notes is expected to be less disruptive. The lower value of notes being withdrawn over a longer period allows for a smoother transition.
Timing of the Move:
In a recent development, the Reserve Bank of India (RBI) has made the decision to discontinue the usage of ₹ 2,000 banknotes. Citizens have been given a deadline of September 30, 2023, to exchange or deposit these notes. While the government did not specify the reason for the timing of the move, analysts suggest it may be related to upcoming state and general elections when cash usage typically increases. Making the move ahead of elections is seen as a wise decision to prevent any potential misuse of high-value notes.
Impact on Economic Growth:
The withdrawal of the 2000-rupee notes, which represent about 10.8% of the currency in circulation, is not expected to cause significant disruption. Smaller denomination notes are available in sufficient quantity, and the scope of digital transactions and e-commerce has expanded in recent years. However, small businesses and cash-oriented sectors like agriculture and construction may experience some inconvenience in the short term.
Effect on Banks:
The withdrawal of the high-value notes will lead to increased deposits in banks as people exchange or deposit them. This will improve banking system liquidity, which has been beneficial as deposit growth has lagged behind credit growth. The influx of deposits may also reduce the need for deposit rate hikes.
Implications for Bond Markets:
The improved liquidity in the banking system and the influx of deposits could lead to a drop in short-term interest rates in the market. The funds from the deposits may be invested in shorter-term government securities, positively affecting the bond markets.
By removing the ₹ 2000 note from circulation, India aims to reduce the usage of high-value currency and encourage digital transactions while minimizing disruptions to the economy. The move is expected to have positive effects on banking system liquidity and short-term interest rates, although certain sectors reliant on cash transactions may face temporary inconvenience.