Global Courant 2023-05-19 21:08:40
MUMBAI — India will withdraw its highest-value banknotes from circulation, the central bank said Friday, in a move economists say could boost bank deposits at a time of high credit growth.
The withdrawal of 2,000 rupee (S$32.44) banknotes – which, according to top finance ministry official TV Somanathan, would not cause disruption “neither in normal life nor in the economy” – also comes ahead of the elections in four major states at the end of the year and a national vote in the spring of 2024.
It is believed that most political parties in India are hoarding cash in high denominations to fund election campaign expenses in order to circumvent strict spending limits imposed by the Election Commission.
When announcing the withdrawal, the Reserve Bank of India (RBI) said there was evidence that the denomination was not widely used for transactions.
The notes will remain legal tender, it added, but people will be asked to deposit and exchange them for smaller denominations by Sept. 30.
“Stocks of banknotes in other denominations remain sufficient to meet the public’s currency needs,” the RBI added in a statement.
The 2,000 rupee note was introduced in 2016 after the government led by Narendra Modi abruptly withdrew denominations of 500 and 1,000 rupees in an effort to remove counterfeits from circulation.
There is little evidence that the plan succeeded, but the move did create a systemic cash shortage by taking 86 percent of the economy’s circulating currency overnight.
The government started issuing new 500 rupee notes days later and added the 2,000 to more quickly replenish the currency in circulation.
Since then, however, the central bank has focused on printing notes of 500 rupees and below and has not printed any new 2,000 rupee notes in the past four years.
Pronab Sen, an economist and former chief statistician of India, called the withdrawal of the higher denomination note “a sensible form of demonetization.”
Karthik Srinivasan, Senior Vice President of Financial Sector Ratings at ICRA, said bank deposit growth “could improve marginally in the near term”.
“This will ease pressure on deposit rate increases and could also lead to moderation in short-term interest rates,” he added.
Indian banks have reported double-digit credit growth in recent months, despite RBI rates rising 250 basis points since last May. Banks are collecting deposits at a faster pace to meet growing demand and tightening liquidity. REUTERS
