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Withdrawal of 2,000-Rupee Currency Notes to Boost Bank Deposits in India

A report released by the State Bank of India Monday said the withdrawal of 2,000-rupee notes could result in a boost in bank deposits, repayment of loans and consumption.

India’s central banking institution the Reserve Bank of India (RBI) last month announced it will withdraw 2,000-rupee currency notes from circulation. The RBI said 2,000 denomination notes will continue to be legal tender until Sept. 30 and people can exchange them at the banks by then.

According to SBI’s economic research report Ecowrap, the move will take pressure off substantially from near war-like quest for deposits from the banking system, while also smoothening the bias for higher interest rates going forward. Additionally, the move effectively anchors the surge in incremental C/D (Credit-Deposit) ratio, nearing pre-pandemic levels, by filling the coffers and keeping banks ready to meet funding needs from diverse sectors.

According to the RBI, in value terms, the share of 2,000-rupee denomination notes was at 10.8 percent as of March 2023.

The report said 85 percent of these notes have come as deposits. As per the assessment, of the deposited amount, 30 percent each will go into the savings account and loan account, and the remaining 40 percent will be deposited in the current account.

About 60 percent of the notes that have been deposited in the savings account will be withdrawn, resulting in its immediate consumption, the report said.

The RBI first printed 2,000-rupee notes in November 2016 after Indian Prime Minister Narendra Modi announced the withdrawal of 500-rupee and 1,000-rupee currency notes from the country’s financial system.

The controversial move, known as demonetization, took 86 percent of the currency out of circulation overnight from India. The announcement triggered panic among those who queued outside banks and Automated Teller Machines to exchange the banned currency notes and withdraw cash.

The move turned out to be a nightmare for the poor and middle class.

The government had defended scrapping high-value currency notes, saying the measure was meant to root out illegally hoarded cash (black money) and to crack down on corruption and terror financing.

The government later introduced new 500-rupee and 2,000-rupee denomination notes.