Rs 2000 notes withdrawal to boost deposits, consumption, among other parameters, argues SBI Research

Though the Reserve Bank of India may have decided to withdraw Rs 2000 banknotes from circulation as a part of its currency management, the move is likely to boost various macroeconomic parameters. On May 19, 2023, RBI decided to withdraw the Rs 2000 denomination banknotes from circulation but said it will continue to remain as legal tender. However, RBI has advised banks to stop issuing such banknotes with immediate effect. The Rs 2000 denomination banknote was introduced in November 2016 under Section 24(1) of the RBI Act, 1934, primarily to meet the currency requirement of the economy in an expeditious manner after the withdrawal of the legal tender status of all Rs 500 and Rs 1000 banknotes in circulation at that time.
The objective of introducing Rs 2000 banknotes was met once banknotes in other denominations became available in adequate quantities. Therefore, the printing of Rs 2000 banknotes was stopped in 2018-19.

SBI Research in a report analysed and argued how the withdrawal of Rs 2000 banknotes could boost bank deposits, repayment of loans, consumption, RBI's retail digital currency usage, and overall economic growth. RBI Governor Shaktikanta Das the other day said 50 per cent of the to-be-withdrawn Rs 2,000 notes had already come back to the system after the May 19 announcement, and of those 85 per cent were through bank deposits. "Totally so far about Rs 180,000 crore of Rs 2000 notes have come back. This is roughly about 50 per cent of the Rs 2000 notes which were in circulation on March 31," RBI Governor Das said at a post-monetary policy meeting press conference, adding about 85 per cent of those notes, on a provisional basis, have come back as deposits in bank accounts.

On the basis of the RBI governor's comments, the SBI Research in its latest Ecowrap report, put out on Monday, authored by Group Chief Economic Adviser Soumya Kanti Ghosh, argued that deposits are likely to increase. "Though some amount would be withdrawn following the deposit, but going by the current trends, CASA deposits are likely to increase (Rs 1.5 lakh crore) due to this measure," the SBI Research report said. The report, citing All Scheduled Commercial Bank (ASCB) data, said it shows that there has been an increase in total deposits of Rs 3.3 lakh crore during the fortnight ended Jun 2, 2023. "The average increase in deposits during the same fortnight in the last two years was around Rs 1.5 lakh crore. Thus, taking that also into account, banks may have received additional deposits of around Rs 1.8 lakh crore during the fortnight this year. It seems Corporates, flush with in-hand liquidity, are parking the additional funds with Banks," the report added. Adding to the Rs 2000 banknote deposits, some of the sectors -- Refinery, Oil and Gas, Power, and Chemicals -- which reported improved cash and bank balance, according to the report, are believed to be more active in parking funds with banks.

On the credit front, as per SBI Research's assessment, 30 per cent of deposits (or Rs 92,000 crore) might go for loan payment and argued that credit growth continues to remain quite strong despite repayments getting frontloaded. Further, the Ecowrap report argued that one of the other major benefits of withdrawal of Rs 2000 note might be the immediate uptick in consumption demand. As per estimates, the consumption demand may be frontloaded by Rs 55,000 crore. "With the banknote remaining a legal tender, unlike demonetization, consumption could see a boost. Though RBI asked customers to deposit or exchange the Rs 2000 notes, but it is expected that high-value amounts could move to high-value spends such as gold/jewellery, high-end consumer durables like AC, mobile phones etc, and real estate," the report said.

Cash value transactions at energy stations, cash on delivery for purchases, donations in temples, and various sundry purchases are also likely to rise, it argued. The total value of these Rs 2000 banknotes in circulation had declined from Rs 6.73 lakh crore at its peak of March 31, 2018 (37.3 per cent of Notes in Circulation) to Rs 3.62 lakh crore constituting only 10.8 per cent of Notes in Circulation on March 31, 2023. It was also observed that this denomination was not commonly used for transactions. Meanwhile, people can exchange or deposit their Rs 2,000 notes in bank branches and regional branches of RBI. A non-account holder also can exchange Rs 2000 banknotes up to a limit of Rs 20,000 at a time at any bank branch. As of now, RBI said the exchange facility is available till September 30, 2023, and the notes continue to be legal tender. September 30 has been decided as the last date for the purpose of completing the exercise in a time-bound manner and to provide adequate time to the public. RBI is likely to revisit the September deadline based on the situation going ahead.

The demonetization drive carried out in 2016 and the withdrawal of Rs 2000 now is not similar. Legal tender status for Rs 500 and Rs 1000 notes were withdrawn right from day one in 2016. For Rs 2000 notes, it, however, continues to be legal tender and people can use it for any transactions. "Good thing is that there has been no rush in any of the banks," the RBI governor said recently, appealing to people not to rush to banks in panic. He particularly urged people to avoid the last-minute rush at bank branches.