Impact of Rs. 2000 note withdrawal

Impact of Rs. 2000 note withdrawal

Subject :Economy

Section: Monetary Policy

Context: Withdrawal of the Rs. 2,000 denomination may improve certain economic parameters, says SBI report.

According to the SBI report, the withdrawal of ₹2,000 currency notes can have a positive impact on the economy through various channels:

1. Enhanced Bank Deposits: Banks were struggling for deposits as the Credit/Deposit (C/D) Ratio was nearing pre-pandemic levels of around 75%. The withdrawal move has effectively helped Banks with this problem. This will help in supporting the Bank’s lending activities. Corporates, from sectors such as Oil, Chemical and Power who have been beneficiaries of consumer expenditure using Rs. 2,000 notes have also made deposits with banks to park the excess cash received.
2. Loan Repayment: As per RBI around 30% of the deposits have gone towards repayment of loans. With fresh credit growing at a healthy pace, this is welcome for banks as it improves the overall C/D Ratio.
3. Consumption Boost: Consumers have resorted to buying discretionary and expensive items to dispose off the Rs. 2,000 notes apart from fuel purchases. This has helped boost the sectors likes, gold, jewellry, real estate and electronic white goods.The consumption inturn boosts performance of companies in these sectors.
4. Reducing need for interest rate hike: RBI is still focused on keeping policy rates elevated to manage to bring inflation to its anchor level of 4%. With the withdrawal of Rs. 2,000 being pulled from the economy, there will be less urgency to increase rates as liquidity stands reduced.
5. Boost to UPI and CBDC E-Rupee:The absence of high denomination note will push people more towards using UPI and CBDC. RBI’s retail Central Bank Digital Currency (CBDC) project (E-RUPI) should benefit as it transitions from a beta-testing phase to broader roll-out.
6. Economic growth rate: The report expects Q1 FY24 GDP growth at around 8.1% due to the impact of ₹2,000 note withdrawal event, and supporting the projection that FY24 GDP could be higher than 6.5% (as per the RBI estimates). This has been attributed to the sudden boost in consumption expenditure as well as improved deposit position of the Banks.

Quick facts on ₹2,000 note withdrawal:

• Before RBI’s currency management move, the share of 2,000 denomination notes valued at ₹3.62 lakh crore was at 10.8% as on March 2023.
• As of June 8, around ₹1.8 lakh crore of ₹2000-rupee notes have come back to the system. Of this, around 85% or ₹1.5 lakh crore have come as deposits and the rest are exchanged for other smaller denomination