The biggest value currency note currently in use in India will be discontinued, the central bank announced on Friday. The 2016-released 2000-rupee note will continue to be accepted as legal money, however individuals are urged to deposit or trade these notes by September 30, 2023.

The choice is reminiscent of a shocking action taken in 2016 by the Narendra Modi-led government, which overnight removed 86% of the cash in circulation in the economy.

However, because a smaller amount of notes are being pulled over a longer period of time this time, analysts and economists anticipate that the move will be less disruptive.

In order to quickly refill the cash in circulation in the Indian economy after demonetisation, 2000-rupee notes were issued in 2016.

However, the central bank has frequently said that it wants to reduce high value notes in circulation and had stopped printing 2000-rupee notes over the past four years.

“This denomination is not commonly used for transactions,” the Reserve Bank of India said in its communication while explaining the decision to withdraw these notes.

Although the government and the central bank did not explain the timing of the decision, analysts note that it occurs before the country’s state and federal elections, when cash usage normally increases.

“Making such a move ahead of the general elections is a wise decision,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. “People who have been using these notes as a store of value may face inconvenience,” she said.

3.62 trillion Indian rupees ($44.27 billion) worth of notes denominated in 2000-rupees are currently in circulation. This represents roughly 10.8% of the currency in use.

“This withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity,” said Nitsure. “Also in the past 6-7 years, the scope of digital transactions and e-commerce has expanded significantly.”

However, Yuvika Singhal, an economist with QuantEco Research, warned that small firms and industries that rely on cash flow, like construction and agriculture, may see difficulties soon.

There might be a spike in discretionary purchases, like as gold, if persons holding these notes were to spend them rather than deposit them in bank accounts, according to Singhal.

Bank deposits will increase as a result of the government’s request that people deposit their notes or swap them for lower denominations by September 30. This occurs at a time when growth in bank credit is outpacing growth in deposits.

According to ICRA Ltd. group head for financial sector ratings Karthik Srinivasan, this will lessen the pressure on deposit rate increases.

Liquidity in the banking system will also increase.

“Since all the 2000-rupee notes will come back in the banking system, we will see a reduction in cash in circulation and that will in turn help improve banking system liquidity,” said Madhavi Arora, economist at Emkay Global Financial Services.

According to Srinivasan, increased banking system liquidity and deposits into banks may cause the market’s short-term interest rates to decline when these funds are invested in shorter-term government assets.

(Adapted from BusinessToday.in)

Categories: Economy & Finance, Regulations & Legal, Strategy, Uncategorized