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According to experts, India’s central bank said on Friday that it will begin removing its highest-value currency notes from circulation. This step could increase bank deposits during a period of rapid credit expansion.
In addition, the removal of the 2,000-rupee ($24.5) notes comes before of the national election in the spring of 2024 as well as four major state elections at the end of the year, according to T.V. Somanathan, the top person in charge of the finance ministry.
In order to avoid the strict spending caps set by the Election Commission, it is thought that the majority of India’s political parties stockpile cash in large denomination bills to pay for election campaign expenses.
The Reserve Bank of India (RBI) announced the withdrawal, citing evidence that the denomination was not frequently utilized for transactions.
It further stated that while the notes will still be accepted as legal cash, holders will be required to deposit and exchange them by September 30 for lesser amounts.
The RBI stated in a statement that “the stock of banknotes in other denominations continues to be adequate to meet the public’s requirement for currency.”
In an attempt to get counterfeit notes out of circulation, the Narendra Modi-led government abruptly removed the 500 and 1000 rupee denominations in 2016. This led to the introduction of the 2,000 rupee note.
Although there isn’t much proof that the scheme worked, it did eliminate 86% of the value of the currency in circulation overnight, which led to a widespread cash shortage.
A few days later, the government started printing fresh 500 rupee notes and then added the 2,000 to quickly refill the money in circulation.
Since then, though, the central bank has concentrated on printing notes valued at 500 rupees and less; during the past four years, no new notes valued at 2,000 rupees have been created.
Economist and former India’s chief statistician Pronab Sen referred to the elimination of the higher-value note as “a sensible form of demonetization.”
The senior vice president of ICRA’s Financial Sector Ratings, Karthik Srinivasan, stated that banks’ deposit accretion rates “may improve slightly in the near term”.
“This could lead to a moderation in short-term interest rates and lessen the pressure on deposit rate hikes,” he continued.
Indian banks have been reporting double-digit growth in lending in recent months, even though the RBI rate has been at 250 basis points since May. In order to keep up with the increasing demand and decreasing liquidity, banks are increasing deposits more quickly.
