Rs 2,000 notes withdrawal can increase bank deposits by Rs 2 lakh crore

As of March-end 2023, Rs 2,000 notes in circulation constituted Rs 3.62 lakh crore or 10.8% of notes in circulation vs Rs 6.73 lakh crore at its peak in March 2018.

Most Rs 2,000 notes are likely to be initially deposited with banks and are expected to improve the deposit base and, thus, system liquidity.

“On a net basis, it is likely that deposits increase by Rs 1.5-2 trillion. Durable liquidity could increase by around Rs 1 trillion depending on the behaviour of depositors. This should ease the credit-deposit ratio across banks,” Kotak Mahindra Bank economists Upasna Bhardwaj and Anurag Balajee said.

Some parts of the notes may be exchanged for a lower denomination and thus will be liquidity neutral. “Some of the new deposits in lieu of Rs 2,000 notes may be temporary in nature and may be drawn immediately in cash thereafter as part of the precautionary currency demand and, thus, will be liquidity neutral,” Emkay Global’s lead economist Madhavi Arora said.

A portion of the otherwise difficult-to-transact Rs 2,000 notes maybe with the public for circumventing the taxation route and may not find its way back into the banking system but instead be spent on high-end consumer durables, gold or even real estate.

“In fact, notes which are not deposited by individuals (undisclosed income, deposits above certain limits, etc.) could move to high-value spends such as gold/jewellery, high-end consumer durables, and real estate (which then reaches bank deposits),” Kotak said.Calculations done by Emkay show that the durable liquidity impact could range from Rs 50,000 crore to Rs 90,000 crore after assuming a new sticky deposit base of 15-30% of the Rs 3.62 lakh crore of Rs 2,000 notes that are in circulation.

“This will help ease the core liquidity deficit, which has led to weighted average call rates (WACR) averaging above the repo rate since mid-April. Liquidity will be further helped by higher-than-budgeted dividend payout by May-end, followed by higher government spending and consistent FX reserves build-up,” Emkay’s Arora said.

Analysts say that higher deposits will ease banks’ deposit costs and likely impact their net interest margins or NIMs positively as credit demand remains broadly unchanged. “SLR demand for the shorter end of the curve would likely improve and with resultant lower probability of OMO purchases in 2HFY24, the yield curve can steepen,” Kotak said, adding that the impact of this measure rests on any fears of eventual demonetization of the Rs 2,000 note.

“If the public were to believe (or made to believe) that the note will always remain a legal tender, there is unlikely to be much of an impact. In case demonetization fears are substantial, we could see few effects,” economists said.

Unlike the November 2016 demonetisation of overnight scrapping of then-existing currencies’ legal status, the present Rs 2,000 notes will continue to remain as legal tender. “This should largely be a non-event assuming the notes remain legal tender. Fear of (eventual) demonetization can imply large deposits and consumption,” Kotak’s Upasna Bhardwaj said.

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