85% People Have Chosen To Deposit Rs 2,000 Notes Instead Of Exchanging Them, Reveals RBI Governor

 

In line with industry-wide expectations, the RBI today announced its decision to keep the repo rate unchanged for the second consecutive time in its MPC meeting. Given that this was RBI’s first MPC meeting after the Rs 2,000 note withdrawal decision, the RBI governor Shaktikanta Das did give an update regarding what the trends have been in the past three weeks. 

“Approximately half of the total Rs 2,000 notes in circulation have come back to the banks,” the RBI governor mentioned at the press conference after the MPC meeting this morning.

Citing bank data, the RBI governor said Rs 2,000 notes worth Rs 3.62 lakh crore were in circulation as of the end of March 2023, of which notes worth Rs 1.8 lakh crore have come back. About 85% of these notes that returned to banks have come back as deposits, Das revealed. This is in line with expectations, he said.

The RBI announced the Rs 2000 note withdrawal on May 19, 2023.

Following the announcement to scrap India's highest-denomination banknotes, economists had said they expected bank deposits to rise by as much as Rs 2 lakh crore, as per ET.

According to analysts, higher deposits will bring down banks’ deposit costs and likely impact their net interest margins or NIMs positively as credit demand remains broadly unchanged. As per RBI data, the percentage of Rs 2,000 notes at the time of their withdrawal was just 10.8% of total notes in circulation, which is a big drop from Rs 6.73 lakh crore at its peak in March 2018. 

Why The RBI Decided To Withdraw Rs 2000 Notes

The RBI withdrew Rs 2,000 notes from circulation in May as part of its 'clean note policy'. At the time of withdrawal, the central bank justified its move by saying these notes have served their purpose. As per an official announcement, people who hold these notes with them can get them exchanged or deposit them by September 30.

Unlike in the case of 2016's demonetisation, the present Rs 2,000 notes will continue to remain legal tender, as per RBI's statement.

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Rs 2,000 notes withdrawal: What’s in store for banks, depositors?

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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Why has the RBI withdrawn Rs 2,000 notes?

The central bank has advised the public to deposit Rs 2000 banknotes, which were introduced after Rs 500 and Rs 1000 notes were withdrawn during the demonetisation exercise six years ago, into their bank accounts and /or exchange them into banknotes of other denominations at any bank branch.

Why has the RBI withdrawn Rs 2000 notes?

The Rs 2000 note was introduced in November 2016 under Section 24(1) of The RBI Act, 1934, primarily with the objective of meeting the currency requirement of the economy expeditiously after the legal tender status of Rs 500 and Rs 1000 notes was withdrawn. With the fulfilment of that objective, and once notes of other denominations were available in adequate quantities, the printing of Rs 2000 notes was stopped in 2018-19.

The RBI issued the majority of the Rs 2000 denomination notes prior to March 2017; these notes are now at the end of their estimated lifespan of 4-5 years. This denomination is no longer commonly used for transactions; besides, there is adequate stock of banknotes in other denominations to meet currency requirements.

“In view of the above, and in pursuance of the ‘Clean Note Policy’ of the Reserve Bank of India, it has been decided to withdraw the Rs 2000 denomination banknotes from circulation,” the RBI said.

And what is the Clean Note Policy?

The Clean Note Policy seeks to give the public good-quality currency notes and coins with better security features, while soiled notes are withdrawn out of circulation. The RBI had earlier decided to withdraw from circulation all banknotes issued prior to 2005 as they have fewer security features as compared to banknotes printed after 2005.

However, the notes issued before 2005 continue to be legal tender. They have only been withdrawn from circulation in conformity with the standard international practice of not having notes of multiple series in circulation at the same time.

So will the Rs 2000 banknotes continue to be legal tender?

The Rs 2000 banknote will continue to maintain its legal tender status, the RBI has said. Members of the public can continue to use Rs 2000 banknotes for their transactions and also receive them in payment. “However, they are encouraged to deposit and/ or exchange these banknotes on or before September 30, 2023,” the RBI said.

What will happen after September 30?

The RBI has not clarified the status of these notes after September 30. However, it has said that its instructions on the Rs 2000 notes will be effective until that date.

What should you do with the Rs 2000 notes you have?

The RBI has advised people to “approach bank branches for deposit and/ or exchange” of these banknotes. “The facility for deposit into accounts and exchange for Rs 2000 banknotes will be available at all banks until September 30, 2023,” the RBI has said. The facility for exchange will also be available until September 30 at 19 RBI Regional Offices that have Issue Departments.

Is there a limit on how much money you can exchange or deposit?

You can exchange Rs 2000 banknotes up to a limit of Rs 20,000 at a time. You don’t have to go your own bank — a non-account holder of bank also can exchange Rs 2000 banknotes up to a limit of Rs 20,000 at a time at any bank branch.

The exchange of Rs 2000 banknotes can also be made through business correspondents up to a limit of Rs 4000 per day for an account holder.

Deposits into bank accounts can be made without restrictions “subject to compliance with extant Know Your Customer (KYC) norms and other applicable statutory / regulatory requirements”, the RBI has said.

When can you start exchanging the Rs 2000 notes?

To give time to banks to prepare, RBI has asked people to approach branches or ROs of RBI from May 23 to exchange their notes.

What happens if someone has a very large number of Rs 2000 notes?

Technically, a person can seek multiple exchanges in packets of Rs 20,000 at a time. However, this is expected to attract the attention of enforcement agencies and the Income-tax Department. Those holding large sums of money in Rs 2000 notes are likely to find it difficult to exchange their money.

Could there be a repeat of the demonetisation chaos of 2016?

It is unlikely that bank branches will witness chaos and long queues like in 2016 this time. The printing of Rs 2000 notes was stopped in 2018-19, and they are no longer commonly seen with the public — unlike the ubiquitous Rs 500 and Rs 1000 notes in 2016.

Also, the decision to withdraw Rs 500 and Rs 1000 notes was announced suddenly, taking the public by surprise. The exchange Rs 2000 notes will begin only on May 23, so banks and the public have sufficient time.

Could there be a repeat of the demonetisation chaos of 2016?

It is unlikely that bank branches will witness chaos and long queues like in 2016 this time. The printing of Rs 2000 notes was stopped in 2018-19, and they are no longer commonly seen with the public — unlike the ubiquitous Rs 500 and Rs 1000 notes in 2016.

Also, the decision to withdraw Rs 500 and Rs 1000 notes was announced suddenly, taking the public by surprise. The exchange Rs 2000 notes will begin only on May 23, so banks and the public have sufficient time.

Banks holding currency chests (CCs) should ensure that no withdrawal of Rs 2000 denomination is allowed from the CCs. All balances held in the CCs should be classified as unfit and kept ready for dispatch to the respective RBI offices.

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Salient features of New Rs10 denomination Bank note

The Reserve Bank of India has announced to issue Rs10 denomination banknotes in the Mahatma Gandhi (New) Series, bearing the signature of Dr. Urjit R. Patel, Governor, RBI.

The new denomination has motif of Sun Temple, Konark on the reverse, depicting the country’s cultural heritage. The base colour of the note is Chocolate Brown. The dimension of the banknote will be 63 mm x 123 mm.

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