June 21, 2024
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₹ 2,000 Note Withdrawal To Improve Liquidity, Ease Short-Term Rates: Experts

The Reserve Bank of India (RBI) has decided to withdraw its highest denomination currency note from circulation, which is expected to have positive effects on the banking system. Analysts and bankers believe that this move will improve liquidity and reduce short-term interest rates. The RBI will begin withdrawing 2,000-rupee notes from circulation, but they will still be considered legal tender. Individuals holding these notes can either deposit them or exchange them for smaller denominations by September 30, 2023.

The total value of these notes currently in circulation is 3.6 trillion rupees ($44.02 billion), but not all of this amount will be deposited in banks. Estimates suggest that liquidity could improve by around 1 trillion rupees, depending on the depositors’ behavior. However, different research firms provide varying projections, with potential liquidity impacts ranging from 400 billion rupees to 1.1 trillion rupees.

ICICI Securities Primary Dealership predicts that the liquidity surplus could increase to 1.5-2 trillion rupees. Currently, India’s banking system has had an average liquidity surplus of over 600 billion rupees in May. Roughly 2.5-3 trillion rupees of liquidity from the banking sector leaks out as currency in circulation each year.

Most economists believe that this note withdrawal will be less disruptive for the economy compared to the 2016 demonetization. If the liquidity surplus significantly improves due to this measure, the weighted average call rate is expected to remain below the repo rate in the coming weeks. Short-term interest rates for government securities, bank bulk deposits, and corporate borrowings are also expected to decrease.

Experts anticipate a strong demand for Treasury bills in the upcoming weeks, which would subsequently affect three-year and five-year bonds, potentially leading to a decrease in yields by up to 10 basis points.

Given the improved liquidity situation and decreasing inflation, investors are likely to increase their bullish bets on Indian government bonds across different maturities, especially as the market prices in anticipated rate cuts.

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