₹2,000 withdrawal will have favourable impact on liquidity, bank deposits and interest rates: SBI Ecowrap

Although the impact of the Rs 2,000 banknote withdrawal is not an event, there will be a positive impact on liquidity, bank deposits and interest rates, according to the State Bank of India’s economic research report, ‘Ecowrap’.

“Deciphering the exchange/deposit dynamics, as we realize, banks will already hold some of these notes in their currency funds, so the impact on deposits will be limited.”

“We believe that almost the entire amount of ₹3.6-lakh crores (from 2,000 banknotes in circulation) (about ₹3 crores excluding the amount in currency funds) will return to the banking system,” said Soumya Kanti Ghosh, Group. Chief Economic Adviser, SBI.

Why did the Reserve Bank of India withdraw 2,000 rupee notes?
Why did the Reserve Bank of India withdraw 2,000 rupee notes?

Assuming 10-15 per cent of total Rs 2,000 crores banknotes are in currency bins, then of the remaining Rs 3 crores, if MPC (marginal propensity to consume) is assumed to be 0.7, about Rs 2-2.1 crores will be assumed to be spent by consumers (either by purchasing outright or by exchanging them for notes of smaller denominations), according to accounts in the report.

Therefore, approximately Rs 1 crore is directed deposits in banks. Moreover, the balance of payments surplus in FY24 is expected to reach $1.5-2.0 billion, providing further liquidity support.

“More importantly, a temporary change in liquidity will lead to a decline in returns, more on the shorter end of the curve,” Ghosh said.

He added that a positive position in forwards and range-bound movement in USD/INR also suggests strong dollar selling from Mint Street, preferably through forwards buy/sell swaps, exposing any unjustified decline from these levels.

Ghosh estimated that there could be a 25-30 basis point drop in money market rates due to the increased inflow of deposits.

“This would lead to a breakdown in short-ended futures points which the Reserve Bank of India (RBI) may use to liquidate its existing short-end positions,” he said.

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

“However, bankers believe that any additional gains on deposits are welcome at this juncture amid the tight liquidity situation, while it may even precipitate a moderation in deposit/demand funds/government safety rates amid growing signs of early rate easing,” she said. According to a report by Anand Dhamma, Het Khemawat, and Dixit Sankherva, EGFSL Analysts.

Analysts believe that the economic disruption of the current move to withdraw $2,000 notes will be limited as other notes will still be in circulation, and therefore, there may not be much business/collection disruption.

Non-bank financial institutions as well as MFIs have come a long way in terms of reducing cash collection and, therefore, the impact, if any, should be limited.