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Reserve Bank of India has decided to withdraw ₹2,000 notes According to a research report, the deposit base and liquidity of banks in the money market can be increased by anywhere between ₹40,000 crore to ₹1.1 lakh crore, even if only about one-third of these heavily hoarded high currency notes are converted into liquid currency. be put out of practice.
The notes, which are being hoarded to avoid taxes on unaccounted income, could be funneled into assets like real estate and jewellery, the report said. The central bank has said that the notes will remain legal tender, but has asked holders of such notes to deposit or exchange them by September 30 this year.
With no clarity yet on what would be the status of these notes after that deadline, a flurry of exchanges is expected over the next four months, which will bring back “the memories of demonetisation” from 2016, Quantico Research said in a note. can wake up again”. The stock of ₹2,000 denomination notes is estimated to be around ₹3.7 lakh crore or 1.3% of GDP – equivalent to 10.8% of cash in circulation at the end of March – the note said, adding that banks’ deposit base would be strengthened if all Those notes were returned by the stipulated time limit.
deposited cash
However, since the ₹2,000 denomination notes were not commonly used for transactions, this implies that hoarding was done either for precautionary reasons or to circumvent formal taxation channels. In any case, the increase in banks’ deposit base due to withdrawal from circulation may prove to be temporary as precautionary demand will eventually settle for lower denominations,” Quantico’s team of economists, led by founder Shubhada Rao, pointed out.
“The unaccounted income could push up demand for high-value consumption goods such as real estate and precious metals (as experienced after the demonetisation episode in 2016),” he added.
“However, if we imagine a scenario where 10%-30% of the hoarded cash comes back into circulation, this would have a knock-on effect on banks’ deposit base and money market liquidity in the range of ₹400-1,100 billion. can have lasting effects,” he concluded.
dividend income
The report said that another decision taken by the central bank last Friday – to transfer a whopping ₹87,416 crore to the government as dividend, as against about ₹30,300 crore in 2022-23 – will also boost liquidity. Will give The government had made a provision of only around ₹48,000 crore as dividend income from financial institutions including RBI in its 2023-24 budget.
The move provides the Center with a fiscal buffer of around 0.13%-0.15% of GDP and will help reduce some of the expenditure spillover that could potentially happen during the year. “More importantly, this robust dividend transfer will provide a bonanza for core money market liquidity with the central government eventually using it for its expenditure in the coming months,” the report underlined.