Informist, Monday, May 22, 2023
MUMBAI – Liquidity in the banking system will likely jump due to the withdrawal of 2,000-rupee banknotes from circulation as bank deposits surge until Sep 30, the target date announced by the Reserve Bank of India for the move.
The 2,000-rupee banknotes account for only 10.8% of the notes in circulation or 3.6 trln rupees to be precise. These notes can be either exchanged or deposited in bank branches or the RBI’s 19 regional offices, starting Tuesday.
While drawing a distinction between withdrawal of notes during the 2016 demonetisation period versus now, analysts said that liquidity boost was more in 2016 since the withdrawn 500- and 1,000-rupee banknotes constituted about 85% of the currency in circulation, and ceased to be recognised as a legal tender with immediate effect.
On the quantum of liquidity infusion, Nomura said in a research report that it estimates around 1.0-1.5 trln rupees of liquidity to come back to the banking system in the near term. Further, the quantum of liquidity infusion will depend on the size and speed of the reduction in currency in circulation, which was a common concern across analysts.
“On the deposit front, experience from demonetisation showed that around 30% to 40% of the value of notes withdrawn went into bank deposits. Using this as a guide-post, around 1.4 trln rupees could flow into bank deposits, which represents 0.8% of total bank deposits,” IDFC FIRST Bank said in a report.
Analysts see the impact on the real economy to be minimal, given the quantum of currency being withdrawn is significantly smaller. Moreover, the period for the entire process to culminate is spread out over a span of four months, unlike 2016 demonetisation, when the then-existing currencies’ legal status was scrapped overnight.
It was a bumper Friday for the banking system liquidity surplus, with the influx of the Reserve Bank of India’s dividend transfer to the government for 2022-23 (Apr-Mar), announced on Friday. The central bank transferred a surplus of 874.16 bln rupees to the government, against a dividend of 303.07 bln rupees for 2021-22.
The RBI surplus to the government exceeds Budget estimates for the current financial year that pegged the government’s income from dividends from the RBI and state-owned banks at 480 bln rupees
However, banks may get to revel in the sudden liquidity spurt for a short period of time only until the excess starts to ebb, analysts said. According to IDFC First Bank, core liquidity is expected to reduce in the second half of 2023-24 (Apr-Mar) as currency leakage picks-up pace, opening-up space for durable infusion of liquidity by the RBI by the end of the current financial year. The bank expects demand for cash to only be lower by 500 bln rupees for the full year.
Emkay Global Financial Services cited a series of reasons for the rise in system liquidity to be transient. While a bulk of the 2,000-rupee notes will likely be deposited with banks, leading to a rise in system liquidity by about 1.4-1.6 trln rupees, it also depends on how much is exchanged. Moreover, liquidity could also remain unaffected as people may seek cash withdrawals soon after depositing their 2,000-rupee stock of notes with the banks, as a precautionary measure in light of ongoing currency demand.
“A portion of the otherwise difficult-to-transact 2,000-rupee notes may be with the public for circumventing the taxation route and may not find its way back into the banking system but instead be spent on high-end consumer durables/gold/or even real estate,” Emkay said in its research report.
Equirus Securities echoed the sentiment and said liquidity boost could be lower if notes are exchanged instead of being deposited, or if the pace of deposit is slower as the permissible window is spread over a period of four months. It pegs the increase in banking cash surplus at 1.0-1.2 trln rupees. End
Reported by Kasthuri Akhil
Edited by Akul Nishant Akhoury
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