MUMBAI, May 19 (Reuters) – The Reserve Bank of India (RBI) announced on Friday that it would initiate the withdrawal of the highest value currency notes in circulation, a move expected to have positive implications for bank deposits amid a period of high credit growth.
The 2,000-rupee ($24.5) notes, which were introduced in 2016 following the sudden withdrawal of 500 and 1,000 rupee denominations, will be phased out. The withdrawal is not anticipated to cause disruptions in daily life or the economy, according to T.V Somanathan, a top official from the finance ministry. The decision to withdraw the notes coincides with upcoming elections in four major states later this year and a national ballot in spring 2024.
The withdrawal is particularly significant because political parties in India are believed to hoard cash in high denomination bills to fund election campaigns and circumvent spending limits imposed by the Election Commission.
The RBI stated that evidence indicated the 2,000-rupee note was not commonly used for transactions. While the notes will remain legal tender, individuals will be required to deposit and exchange them for smaller denominations by September 30.
The RBI reassured the public that an adequate supply of banknotes in other denominations is available to meet currency requirements. The central bank’s focus in recent years has been on printing notes of 500 rupees and below, with no new 2,000-rupee notes being printed since their introduction.
Economist and former chief statistician of India, Pronab Sen, praised the withdrawal of the higher-value note as a “sensible form of demonetisation.” Karthik Srinivasan, Senior Vice President Financial Sector Ratings at ICRA, predicted that the move could slightly improve banks’ deposit accretion rates in the short term. This, in turn, may alleviate pressure on deposit rate hikes and potentially lead to a moderation in short-term interest rates.
Indian banks have been experiencing double-digit credit growth in recent months, despite a 250-basis point rate increase by the RBI since last May. To meet the rising demand and tighten liquidity, banks have been raising deposits at an accelerated pace.
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