Over a week after banks started exchanging or depositing Rs 2,000 notes on May 23, over Rs 80,000 crore is estimated to have reached the banking system despite the different rules being adopted by banks for the exercise.
While almost the entire Rs 3.6 lakh crore worth of Rs 2,000 notes is expected to come into the banking system as another four months remain for the deadline to exchange or deposit of these notes, the surplus cash accruing to the banks is expected to bring down deposit rates as witnessed during the 2016 demonetisation.
What is the impact on currency in circulation so far?
According to RBI data, currency in circulation (CIC) has fallen by Rs 36,492 crore to Rs 34.41 lakh crore during the week ended May 26. The RBI asked banks to exchange or deposit Rs 2,000 notes from May 23. CIC is expected to decline further in the coming weeks. Currency in circulation refers to cash or currency available with the public that is physically used to conduct transactions between consumers and businesses.
How do banks view this?
State Bank of India Chairman Dinesh Khara says Rs 14,000 crore has been deposited in accounts and Rs 3000 crore has been exchanged. Bank of India has received Rs 3,100 crore worth Rs 2,000 notes. Overall, banks are estimated to have received over Rs 80,000 crore worth of Rs 2,000 notes after the RBI announced the withdrawal of these notes from circulation, according to a banking source.
With another four months to go for the deadline of September 30 for exchanging notes, banks expect almost the entire amount to come back into the banking system. “We believe that the almost the entire amount of Rs 3.6 lakh crore will come back (Rs 3 lakh crore excluding the amount in currency chests) to the banking system,” says Soumya Kanti Ghosh, Group Chief Economic Adviser, State Bank of India.
Withdrawal of Rs 2,000 notes could see an infusion of Rs 1-1.8 lakh crore of liquidity over the June-September period, according to a Care Ratings report. Comfortable liquidity conditions could ease short-term rates going ahead, it said.
According to SBI, there will be a favourable impact on liquidity, bank deposits and interest rates. Decoding exchange-deposit dynamics, we understand, banks will already be holding some of these notes in their currency chests, thus the impact on deposits will be limited.
Assuming that 10-15 per cent of the total Rs 2000 notes are in currency chests, then of the remaining Rs 3 lakh crore, Rs 2-2.1 lakh crore would be spent by the consumers (either direct purchase or by exchanging it with smaller denominations notes), approximately Rs one lakh crore is destined deposits in banks, SBI says. However, going by the trend so far, deposits are likely to be higher than Rs one lakh crore estimated by the banks earlier.
“The withdrawal of Rs. 2,000 banknotes is likely to boost short-term liquidity in the banking sector thereby reducing the pressure on deposit rates. The banks may use incremental deposits to increase credit growth. This is likely to reduce the pressure on net interest margins,” said a Care Ratings report.
What’s the impact on bond yield?
The transitory change in the liquidity would lead to decline in yields, more at the shorter end of the curve. “We understand there should be fall of 25-30 bps (basis points) in money market rates due to incremental deposits flow. This should lead to short end forward points collapsing which the RBI may use to square off its existing short end positions,” SBI said.
The yield on 10-year benchmark government bonds has fallen below 7 per cent level to 6.98 per cent on Wednesday. Various factors like comfortable liquidity, rise in deposits and fall in yields and inflation are likely to prompt the RBI to keep the policy interest rates unchanged in the June policy review.
The 47 basis points decline in 10-year bond yields this year is an indicator that the interest rates have peaked and is set to decline if inflation also remains low. After the demonetisation in 2016, deposit rates subsequently declined. In short, savers and pensioners should not expect more hike in deposit rates.
Will cash with public surge?
After the government announced withdrawal of Rs 500 and Rs 1000 notes on November 8, 2016, cash with public started surging and it’s now at a new high. With cash remaining the preferred mode of payment, currency with public for the fortnight ended May 19, 2023 stood at a record high of Rs 33.71 lakh crore — up 270 per cent from Rs 9.11 lakh crore recorded on November 25, 2016, two weeks after Rs 500 and Rs 1,000 notes were withdrawn from the system.
According to the latest RBI data, cash with the public jumped by 87.6 per cent, or Rs 15.74 lakh crore, from Rs 17.97 lakh crore on November 4, 2016, days before the demonetisation was announced. The year-on-year rise in cash with the public was Rs 253,435 crore as on May 19, 2023.
After Rs 500 and Rs 1,000 notes were withdrawn from the system in November 2016, currency with the public, which stood at Rs 17.97 lakh crore on November 4, 2016, declined to Rs 7.8 lakh crore in January 2017 soon after demonetisation. However, analysts don’t expect a big surge in cash with public following the withdrawal of Rs 2,000 notes.
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