MUMBAI (Reuters) – India will start withdrawing its most valuable notes from circulation, India’s central bank said on Friday, a move economists said could boost bank deposits at a time of high credit growth.
The withdrawal of 2,000 rupees ($24.5) in banknotes – which the finance ministry’s chief official, TV Somanathan, said would not cause disruption “either in normal life or in the economy” – also comes ahead of elections in four major states at the end of the year and polling. National in the spring of 2024.
It is believed that most political parties in India hoard cash in high-denomination bills to finance campaign expenses to get around strict spending restrictions imposed by the Election Commission.
Announcing the withdrawal, the Reserve Bank of India (RBI) said evidence showed the label was not commonly used in transactions.
She added that the notes would remain legal tender, but people would be required to deposit them and exchange them for smaller denominations by September 30.
“The stock of banknotes of other denominations remains sufficient to meet the currency requirements of the public,” the Reserve Bank of India added in a statement.
The 2,000 rupee note was introduced in 2016 after the government led by Narendra Modi suddenly withdrew the 500 and 1,000 rupee notes in a bid to remove counterfeiting from circulation.
There is little evidence that the plan worked, but the move created a systemic liquidity shortage by siphoning off 86% of the economy’s currency in circulation by value overnight.
The government started issuing new 500 rupee notes days later, and added 2,000 rupees to replenish the currency in circulation at a faster pace.
However, since then, the Central Bank has focused on printing notes of 500 rupees and below and has not printed any new 2000 rupee notes in the last four years.
Pronap Sen, an economist and former chief statistician of India, called the withdrawal of the higher value note “a reasonable form of de-circulation”.
Karthik Srinivasan, senior vice president of financial sector ratings at ICRA, said banks’ deposit accumulation rates “could improve marginally in the near term”.
“This will ease the pressure on raising interest rates on deposits and could also lead to moderation in short-term interest rates,” he added.
Indian banks have reported double-digit credit growth in recent months, despite a 250 basis point RBI drop since last May. Banks are increasing deposits at a faster pace to meet the growing demand and tighter liquidity.
($1 = 81.7800 Indian Rupees)
Reporting by Ira Dougal. Editing by Andrew Heavens
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