Withdrawal of ₹2,000 will have favorable impact on liquidity, bank deposits and interest rates: SBI Ecowrap

Even though the impact of the withdrawal of a 2,000 rupee note is not an event, there will be a favorable impact on liquidity, bank deposits and interest rates, according to the Economic Research Report of the State Bank of India, “Ecowrap”.

“Deciphering the exchange/deposit dynamics, we understand that banks are already holding some of these notes in their currency vaults, so the impact on deposits will be limited.”

“We believe that almost the entire amount of ₹3.6 lakh crore (out of ₹2,000 banknotes in circulation) will return (approximately ₹3 lakh crore excluding the amount in the coin vaults) to the banking system,” said Soumya Kanti Ghosh, Group Chief Economic Advisor, SBI.

Why did the RBI withdraw ₹2,000 banknotes?
Why did the RBI withdraw ₹2,000 banknotes?

Assuming that 10-15% of the total ₹2,000 notes are in coin safes, then out of the remaining Rs 3 lakh crore, if MPC (marginal propensity to consume) of 0.7 is assumed, around 2 at ₹2.1 lakh crore to be spent by consumers (either by direct purchase or by exchanging it for smaller denominations), according to the report’s calculations.

Thus, about ₹1 crore lakh is for deposits in banks. Additionally, the balance of payments surplus in FY24 is expected to reach $1.5-2.0 billion, providing further liquidity support.

  • Read: Withdrawal of ₹2,000 note, a prudent measure

“It’s important to note that the transitory change in liquidity would drive yields lower, more at the shorter end of the curve,” Ghosh said.

The favorable position in futures premiums and the movement related to the US dollar/Indian rupee range also indicates an aggressive sale of dollars from Mint Street, preferably through forward sale/purchase swaps, counteracting any unwarranted depreciation by compared to those levels, he added.

Ghosh estimated there could be a 25 to 30 basis point drop in money market rates due to the flow of additional deposits.

“This should lead to the collapse of short-term forward points that RBI could use to offset its existing short-term positions,” he said.

Meanwhile, Emkay Global Financial Services Ltd, in a report on withdrawal of banknotes (CNW), said that net deposit mobilization (adjusted for withdrawals) due to CNW of ₹2,000 will be limited after the surge initial.

“That said, bankers believe any additional deposit windfall is welcome at this point in a tight liquidity environment, while it may even precipitate moderation in deposit rates/cash/government security amid increased signs of early policy rate easing,” according to a report by EGFSL analysts Anand Dama, Heet Khimawat and Dixit Sankharva.

Analysts believe that the economic disruption of the current decision to withdraw the ₹2,000 notes will be limited as other denomination notes will remain in circulation and therefore may not have much trade/collection disruption.

NBFCs as well as MFIs have also come a long way in terms of reduced inflows and therefore should limit the impact, if any.