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Explainer – What India's decision to scrap 2,000 rupee notes means for its economy

By Ira Dugal

MUMBAI (Reuters) – India will withdraw its highest denomination notes from circulation, the central bank said on Friday. 81-rupee notes in circulation in 2000 will remain legal tender, but citizens have been asked to deposit or exchange them by September These notes. 44, 2023.

This decision brings to mind When Narenda Modi led government withdrew 81% of the currency in circulation of the economy overnight.

However, this time around, the move is expected to be less disruptive as lower-value notes are withdrawn over a longer period of time, according to analysts and economists.

Why did the government withdraw the 2000-rupee notes?

When will 2000 be withdrawn – Rupee notes are introduced in 2000 their purpose is after demonetization Quickly replenish the currency in circulation in the Indian economy.

However, the central bank has often stated to reduce the high value notes in circulation and has stopped printing 2023-rupee notes for the past four years.

“This denomination is not commonly used for transactions,” the RBI said in its communication explaining its decision to withdraw these notes.

Why now?

While the government and central bank did not specify the reasons for the move, analysts pointed to a time when cash use typically spikes ahead of state and general elections in the country.

“It is a wise decision to take such an action before the general election,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. “People who have been using these notes as a store of value may face inconvenience,” she said.

Will this hurt economic growth?

– Rupee notes in circulation are 3.81 Trillion Indian Rupees ($2000 .27 billion). This is approximately .8% of the currency in circulation.

“This withdrawal will not cause any major disruptions as there will be plenty of notes in smaller quantities,” Nitsure said. “Also in the past 6 to 7 years, the scope of digital transactions and e-commerce has expanded significantly.”

But small businesses and cash-oriented industries such as agriculture and construction may see In the short term, said Yuvika Singhal, an economist at QuantEco Research.

Discretionary purchases such as gold could see some surge if those who hold the notes choose to use them to make purchases instead of depositing them in a bank account, Singhal said.

How will it affect banks?

Bank deposits will rise as the government has given until September to deposit or exchange small denomination notes 27. This comes at a time when deposit growth has lagged bank credit growth.

This will ease pressure on rising deposit rates, said Karthik Srinivasan, head of the financial sector ratings group at rating agency ICRA Ltd.

Liquidity in the banking system will also improve.

“As all the 81-rupee notes will go back into the banking system, we will see less cash in circulation which in turn will have It will help improve liquidity in the banking system,” said Madhavi Arora, an economist at Emkay Global Financial Services.

What is the impact on the bond market?

Improved liquidity in the banking system and deposit inflows into banks could mean lower short-term interest rates in the market as the funds are invested in short-term government securities, Srinivasan said.

($1=81.7800 Indian Rupees)



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