By Ira Dugal

MUMBAI (Reuters) – India will withdraw its highest denomination foreign money observe from circulation, the central financial institution mentioned on Friday. The 2000-rupee observe, launched into circulation in 2016, will stay authorized tender however residents have been requested to deposit or alternate these notes by Sept. 30, 2023.

The resolution is harking back to a shock transfer in 2016 when the Narenda Modi-led authorities had withdrawn 86% of the economic system’s foreign money in circulation in a single day.

This time, nevertheless, the transfer is predicted to be much less disruptive as a decrease worth of notes is being withdrawn over an extended time period, in keeping with analysts and economists.

WHY DID THE GOVERNMENT WITHDRAW 2000-RUPEE NOTES?

When 2000-rupee notes had been launched in 2016 they had been meant to replenish the Indian economic system’s foreign money in circulation rapidly after demonetisation.

However, the central financial institution has often mentioned that it desires to scale back excessive worth notes in circulation and had stopped printing 2000-rupee notes over the previous 4 years.

“This denomination is not commonly used for transactions,” the Reserve Bank of India mentioned in its communication whereas explaining the choice to withdraw these notes.

WHY NOW?

While the federal government and the central financial institution didn’t specify the rationale for the timing of the transfer, analysts level out that it comes forward of state and basic elections within the nation when money utilization usually spikes.

“Making such a move ahead of the general elections is a wise decision,” mentioned Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. “People who have been using these notes as a store of value may face inconvenience,” she mentioned.

WILL THIS HURT ECONOMIC GROWTH?

The worth of 2000-rupee notes in circulation is 3.62 trillion Indian rupees ($44.27 billion). This is about 10.8% of the foreign money in circulation.

“This withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity,” mentioned Nitsure. “Also in the past 6-7 years, the scope of digital transactions and e-commerce has expanded significantly.”

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But small companies and cash-oriented sectors corresponding to agriculture and development may see inconvenience within the close to time period, mentioned Yuvika Singhal, economist at QuantEco Research.

To the extent that folks holding these notes selected to make purchases with them relatively than deposit them in financial institution accounts, there could possibly be some spurt in discretionary purchases corresponding to gold, mentioned Singhal.

HOW WILL IT AFFECT BANKS?

As the federal government has requested individuals to deposit or alternate the notes for smaller denominations by Sept. 30, financial institution deposits will rise. This comes at a time when deposit development is lagging financial institution credit score development.

This will ease the strain on deposit price hikes, mentioned Karthik Srinivasan, group head – monetary sector rankings at score company ICRA Ltd.

Banking system liquidity can even enhance.

“Since all the 2000-rupee notes will come back in the banking system, we will see a reduction in cash in circulation and that will in turn help improve banking system liquidity,” mentioned Madhavi Arora, economist at Emkay Global Financial Services.

WHAT ARE THE IMPLICATIONS FOR BOND MARKETS?

Improved banking system liquidity and an influx of deposits into banks may imply that short-term rates of interest out there drop as these funds get invested in shorter-term authorities securities, mentioned Srinivasan.

($1 = 81.7800 Indian rupees)

(Reporting by Ira Dugal; Editing by Jacqueline Wong)