Introduction
The RBI stated on Friday that Rs 2,000 notes will no longer be in use. The highest-value currency note currently in use in India will be discontinued, the central bank announced on Friday. The 2016-released 2000-rupee note will continue to be accepted as legal money, however, individuals are urged to deposit or trade these notes by September 30, 2023.
The choice is similar to that of a shocking action taken in 2016 by the Narendra Modi-led government, which overnight removed 86% of the cash in circulation in the country's economy. The introduction of the Rs. 2,000 note came after demonetization in November 2016. The choice is reminiscent of a shocking action taken in 2016 by the Narendra Modi-led government, which overnight removed 86% of the cash in circulation in the economy.
Points at hand
1. Currency in the denomination of Rs 2,000 will remain legal tender through September 30.
2. Publicly available Rs 2,000 notes may be placed in bank accounts or changed at banks and the 19 Regional Offices of the RBI.
3. Subject to adherence to current Know Your Customer (KYC) standards and other procedures, transfers of Rs 2,000 notes into bank accounts may be done without limitations.
4. Starting on May 23, everyone can exchange Rs 2,000 notes for a maximum of Rs 20,000 at a time.
5. An account user can exchange Rs 2,000 notes for up to Rs 4,000 per day through banking correspondents.
Since 2018–19, the RBI has stopped printing new Rs 2,000 notes. The pullout came after reports that Rs 2,000 notes were being stored as black money and used for money laundering. Before March 2017, almost 89% of the Rs 2,000 notes were printed.
The total amount of these banknotes in existence fell from Rs 6.73 lakh crore, which represented 37.3% of all notes in circulation as of March 31, 2018, to Rs 3.62 lakh crore, or 10.8% of all notes, as of March 31, 2023.
Analysts and economists predict that this time the change will be fewer inconveniences because a smaller amount of notes are being pulled over a longer period. To quickly refill the cash in circulation in the Indian economy after demonetization, 2000-rupee notes were issued in 2016.
The central bank has often stated that it wants to minimize the amount of high-value notes in movement, and over the past four years, it has ceased issuing 2000-rupee notes. The Reserve Bank of India explained its choice to discontinue these notes in its message by stating that this denomination is not frequently utilized for transactions.
Reason behind it
Although government officials and the central bank did not explain the timing of the decision, analysts note that it occurs before the country's state and federal elections, when spending on cash normally increases.
Making such a step before voting begins is a smart move, according to L&T Finance Holdings' group economist Rupa Rege Nitsure. " Individuals who have been utilizing these notes as an object item could encounter inconvenience," she warned.
In circulation 2000-rupee notes are worth $44.27 billion, or Rs 3.62 lakh crore. This represents roughly 10.8% of the currency in use.
Since there are enough smaller-quantity notes accessible, this withdrawal won't cause significant disruption, according to Rupa Nitsure chief economist at L&T Finance Holdings. The range of digital transactions and e-commerce has greatly increased during the previous 6-7 years, as well.
Small firms and industries that depend on cash flow, like agriculture and construction, could experience difficulties shortly, according to QuantEco Research economist Yuvika Singhal.
According to Singhal, there may be a spike in discretionary purchases like gold if persons carrying these notes decide to spend them instead of placing them in bank accounts.
Which banks will be affected?
By depositing the notes or exchanging them for lesser denominations by September 30, as requested by the government, bank deposits will increase. This occurs at a time when the increase in bank credit is outpacing deposit growth.
According to Karthik Srinivasan, group head of financial services ratings at rating agency ICRA Ltd., this will lessen the load on deposit rate increases and liquidity in the banking system will also increase.
According to Madhavi Arora, an economist at Emkay Global Financial Services, "Since all the 2000-rupee notes will come back into the financial system, we are going to see a decrease in cash in circulation and that will consequently help improve banking system liquidity."
What affects bond markets, and why?
According to Srinivasan, increased banking system liquidity and deposits into banks may cause the market's short-term interest rates to decline when these funds are invested in shorter-term government assets.
Following the demonetization process, which resulted in the use of Rs 500 and Rs 1,000 notes being prohibited, currency notes of Rs 2,000 were launched in November 2016.
According to a notification from the RBI, around 89% of banknotes in the Rs 2000 denomination were printed before March 2017 and are nearing the end of their anticipated lifespan of 4 to 5 years.
Conclusion
The notes will continue to be valid forms of payment, but Indian citizens have been urged to make deposits or exchange them before September 30, 2022. The action is anticipated to increase declining deposit rates and increase the liquidity of the banking system. The move, according to economists, may in the short run assist India's bond markets, but it could create issues for industries that rely on cash, like agriculture and construction.
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