Even though the impact of ₹2,000 rupee note withdrawal is a non-event, there will be a favorable impact on liquidity, bank deposits and interest rates, according to State Bank of India’s economic research report, “Ecowrap”.
“Decoding exchange/deposit dynamics, we understand, banks will already be holding some of these notes in their currency chests, thus the impact on deposits will be limited. “
“We believe that almost the entire amount of ₹3.6-lakh crore (of ₹2,000 banknotes in circulation) will come back (about ₹3 lakh crore excluding the amount in currency chests) to the banking system,” said Soumya Kanti Ghosh, Group Chief Economic Adviser, SBI.
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Assuming that 10-15 per cent of the total ₹2,000 notes are in currency chests, then of the remaining Rs ₹3-lakh crore, if MPC (marginal propensity to consume) of 0.7 is assumed, about ₹2-2.1 lakh crore would be spent by the consumers (either by direct purchase or by exchanging it with smaller denominations notes), as per calculations by the report.
So, approximately ₹1-lakh crore is destined deposits in banks. Moreover, balance of payment surplus in FY24 is expected to the tune of $1.5-2.0 billion, thus providing further liquidity support.
“Importantly, the transitory change in the liquidity would lead to decline in yields, more at the shorter end of the curve,” Ghosh said.
The favorable position in Forward Premia and the range bound movement in US Dollar/Indian Rupee also indicates aggressive Dollar selling from the Mint street, preferably through sell/buy swaps in forwards, checkmating any unwarranted depreciation from these levels, he added.
Ghosh assessed that there could be a fall of 25-30 basis points in the money market rates due to incremental deposits flow.
“This should lead to short end forward points collapsing which RBI may use to square off its existing short end positions,” he said.
Meanwhile, Emkay Global Financial Services Ltd, in a report on currency note withdrawal (CNW) said net deposit mobilization (adjusted for withdrawals) due to CNW of ₹2,000 will be limited after the initial surge.
“That said, bankers believe any incremental deposit windfall is welcome at this juncture amid the tight liquidity condition, while it may even precipitate moderation in deposit/ call money/Government Security rates amid increased signs of early policy rate easing,” per a report by EGFSL analysts’ Anand Dama, Heet Khimawat and Dixit Sankharva.
Analysts believe the economic disruption of the current move to withdraw ₹2,000 banknotes will be limited as other denomination notes will remain in circulation and, thus, may not have much business/collection disruption.
NBFCs as well as MFIs have also come a long way in terms of reducing cash collections and, hence, should limit the impact, if any.
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