The Reserve Bank of India (RBI) has made the decision to withdraw the highest-denomination note of Rs 2,000 from circulation as a part of its currency management strategy. This move is expected to have a significant impact on various aspects of the economy, particularly bank deposits and loan repayments. A study conducted by the State Bank of India (SBI) indicates that the withdrawal of Rs 2,000 currency notes will lead to a boost in bank deposits, loan repayments, and overall consumption. Additionally, it is expected to positively affect the adoption of the RBI’s retail CBDC (central bank digital currency).
Background Information
As of March 23, the value of Rs 2,000 denomination notes in circulation amounted to Rs 3.62 lakh crore, accounting for approximately 10.8% of the total currency. RBI Governor Shaktikanta Das stated on June 8 that around Rs 1.8 lakh crore worth of Rs 2,000 notes have already been returned to the system. Out of this amount, approximately 85% (Rs 1.5 lakh crore) constitutes deposits, while the rest has been exchanged for smaller denominations.
Impact on Bank Deposits and Loan Repayments
The SBI study highlights that despite the significant deposit of Rs 1.5 lakh crore of Rs 2,000 notes in banks, there is still an estimated Rs 60,000 crore that has been spent or exchanged by people over the counter. This implies that the withdrawal of these notes could result in a boost in bank deposits, loan repayments, and overall consumption. Moreover, it may contribute to the growth of the RBI’s retail CBDC and potentially lead to a boost in GDP.
Effects on Banking System and Funding
The withdrawal of Rs 2,000 notes is seen as a “precision strike” by the central bank, addressing multiple issues. It helps alleviate the pressure on the banking system to attract deposits while also smoothing the path for lower interest rates in the future. Furthermore, this move aids in maintaining a healthy credit-deposit (C/D) ratio, which is approaching pre-pandemic levels. The study suggests that Indian banks will have more flexibility to meet the funding requirements of corporates, including expansion plans, through a combination of credit facilities. The corporate sector’s deposit activity, particularly through bulk deposits, has gained momentum due to the favorable returns, liquidity, and safety offered by bank deposits.
Potential Impact on RBI’s Retail CBDC Project
The absence of higher-denomination notes, such as the Rs 2,000 note, may accelerate the adoption of the RBI’s retail CBDC project (E-RUPI) for merchant transactions, alongside physical fiat currency. As the retail CBDC project progresses from beta-testing within the Close User Group (CUG), this tactical move by the RBI is expected to benefit its implementation and promote faster adoption among users.
In conclusion, the withdrawal of Rs 2,000 notes is anticipated to have several positive effects on the economy, including increased bank deposits, loan repayments, and consumption. It also has the potential to support the growth of the RBI’s retail CBDC and facilitate funding requirements for corporates. This strategic move by the central bank aims to optimize currency management and promote a more efficient and robust financial system.
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