panic in India after RBI decision to withdraw Rs 2,000 notes from circulation

Kathmandu: The latest decision by the Reserve Bank of India (RBI) has compelled people to dispose of Rs 2,000 notes in their possession as quickly as possible.

The central bank on Friday announced that Rs 2,000 notes will be withdrawn from circulation. RBI said that people would continue to be able to deposit Rs 2000 banknotes into their bank accounts and, or exchange them into banknotes of other denominations at any bank branch up to September 30, 2023.

But the latest move of the central bank has created a visible sense of panic in markets. Even though RBI has clarified that the notes will continue to be legal tender, there is a visible sense of panic in the markets. ‘There is a huge rush of people trying to dispose of Rs 2,000 notes in their possession’, Times of India reported on Monday.

As people rush to dispose of the highest-value notes, RBI Governor Shaktikanta Das on Monday reiterated that Rs 2,000 notes will continue to be a legal tender, adding that the deadline of September 30 may be reconsidered on the basis of situation. He also said he doesn’t expect a rush in the branches and urged people to not rush to banks.

The Modi-led government introduced 2000-rupee notes in 2016 to replenish the Indian economy’s currency in circulation quickly after demonetisation. However, the central bank has frequently said that it wants to reduce high value notes in circulation and had stopped printing 2000-rupee notes over the past four years.

The value of 2000-rupee notes in circulation is 3.62 trillion Indian rupees ($44.27 billion). This is about 10.8% of the currency in circulation. As the notes of smaller quantity are widely available in the markets, the withdrawal of the notes will not create big disruption, analysts say.

But small businesses and cash-oriented sectors such as agriculture and construction could see inconvenience in the near term, Yuvika Singhal, economist at QuantEco Research, told Reuters.

To the extent that people holding these notes chose to make purchases with them rather than deposit them in bank accounts, there could be some spurt in discretionary purchases such as gold, said Singhal.

As the government has asked people to deposit or exchange the notes for smaller denominations by Sept. 30, bank deposits will rise. This comes at a time when deposit growth is lagging bank credit growth.

This will ease the pressure on deposit rate hikes, said Karthik Srinivasan, group head – financial sector ratings at rating agency ICRA Ltd. Banking system liquidity will also improve.

‘Since all the 2000-rupee notes will come back in the banking system, we will see a reduction in cash in circulation and that will in turn help improve banking system liquidity,” said Madhavi Arora, economist at Emkay Global Financial Services.

Improved banking system liquidity and an inflow of deposits into banks could mean that short-term interest rates in the market drop as these funds get invested in shorter-term government securities, said Srinivasan.