The central bank of India said on Friday that it will begin pulling its highest-value currency notes, the rupee, from circulation, a move that experts say might increase bank deposits at a period of rising credit growth.
The removal of 2,000 rupee ($24.5) notes, which the finance ministry’s senior official, T.V. Somanathan, claimed would not impact “either normal life or the economy,” comes ahead of elections in four big states at the end of the year and a national vote in spring 2024.
The majority of India’s political parties are reported to be hoarding cash in high-denomination banknotes in order to cover election campaign expenditures and avoid the Election Commission’s strict spending limitations.
In announcing the withdrawal, the Reserve Bank of India (RBI) said evidence showed the denomination was not commonly 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.
“The stock of banknotes in other denominations continues to be adequate to meet the currency requirements of the public,” the RBI added in a statement.
The 2,000 rupee note was introduced in 2016 after the Narendra Modi-led government abruptly withdrew the 500 and 1000 rupee denominations in an effort to remove forgeries from circulation.
There is little evidence that the plan succeeded, but the move did create a systemic shortage of cash by taking away 86% of the economy’s currency in circulation by value overnight.
The government began issuing new 500 rupee notes days later and added the 2,000 to replenish currency in circulation at a faster pace.
However, since then, the central bank has focused on printing notes of 500 rupees and below and has printed no new 2,000 rupee notes in the last four years.
Pronab Sen, an economist and former chief statistician of India, called the withdrawal of the higher-value note “a sensible form of demonetization.”
Karthik Srinivasan, Senior Vice President, Financial Sector Ratings at ICRA, said banks’ deposit accretion rates “could improve marginally in the near term”.
“This will ease the pressure on deposit rate hikes and could also result in a moderation in short-term interest rates,” he added.
Indian banks have been reporting double-digit credit growth in recent months, notwithstanding the 250 basis points of the RBI rate since last May. Banks are raising deposits at a faster pace to meet the growing demand and tightening liquidity.
