Photo used for representation purposes only.
The Reserve Bank of India’s decision to withdraw ₹2,000 crore notes could increase banks’ deposit base and liquidity in money markets by anywhere between ₹40,000 crore and ₹1.1 lakh crore, even if about a third of these heavily hoarded high-value notes are flushed through exercise, according to a research report.
Some of those notes that are hoarded to avoid unaccounted-for income taxes could be channeled into assets like real estate and jewelry, the report said. The central bank said the notes would be legal tender, but asked holders of the notes to deposit or redeem them by September 30 this year.
With no clarity on the status of these ratings after this deadline, a flurry of trading is expected over the next four months, which could “rekindle memories of the demonetization” of 2016, QuantEco Research said in a rating. Estimating the stock of ₹2,000 banknotes at around ₹3.7 lakh crore or 1.3% of GDP – equivalent to 10.8% of money in circulation at the end of March – the note states that the deposit base of banks would be strengthened if all these ratings returned within the stipulated time.
“However, since denominations of ₹2,000 were not commonly used for transactions, this implies that they were hoarded for precautionary reasons or to circumvent the formal taxation channel. In either case, the increase in banks’ deposit base due to its withdrawal from circulation could prove temporary as precautionary demand eventually settles for lower denominations,” stressed the team of economists at QuantEco, led by the founder Shubhada Rao.
“Unaccounted income could fuel demand for high-value consumer items like real estate and precious metals (like the experience after the demonetization episode in 2016),” they added.
“However, if we assume a scenario in which 10% to 30% of formerly hoarded cash is released back into circulation, this could have a lasting impact on banks’ deposit base and money market liquidity to the extent of 400 to 1 ₹100 billion,” they concluded.
Another decision taken last Friday by the central bank – to transfer ₹87,416 crore to the government as a dividend, up from around ₹30,300 crore in 2022-23 – would also boost liquidity, the report noted. The government had only budgeted around ₹48,000 crore as dividend income from financial institutions including the RBI in its 2023-24 budget.
The move provides a fiscal buffer of around 0.13% to 0.15% of GDP at the Center and will help to mitigate some of the spending fallout that could potentially take place throughout the year, he said. . “Most importantly, this strong dividend transfer would be a boon to core money market liquidity as the central government potentially uses it for spending in the coming months,” the report said.