RBI’s withdrawal of ₹2000 notes to boost liquidity; seen positive for banks

The central bank on Friday had announced that it will ₹2000 note from circulation, to remain legal tender”>withdraw the ₹2,000 denomination banknotes from circulation and advised banks to stop issuing these banknotes with immediate effect. However, but these notes will continue to remain as legal tender and the general public can deposit or exchange them from banks by September 30, 2023.

“The policy move to withdraw ₹2,000 denomination notes will likely result in a temporary spurt in system liquidity owing to a higher deposit base – part of which may find its way to a durable deposit base/liquidity addition,” said Madhavi Arora, Lead Economist at Emkay Global.

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She estimates ₹0.7- 0.9 lakh crore of durable rise in system liquidity due to the latest RBI’s decision. This, in turn, will reduce but does not eliminate the need for the RBI to do Open Market Operations (OMOs) in H2FY24, according to Arora, as she expects the Gsec curve to steepen in the near term, while forward premia to decrease further, putting pressure on the Indian rupee.

Analysts also expect the development will help banks meet anywhere around 8% of the incremental requirement for FY24 and provide near-term support to the tight deposit conditions.

Additionally, the RBI has also approved the transfer of ₹87,416 crore dividend to the government for FY23, surpassing the budget estimate by 82%.

Kotak Institutional Equities expects that on a net basis, deposits may increase by ₹1.5-2 lakh crore, while durable liquidity could increase by around ₹1 lakh depending on the behavior of depositors, which should ease the credit-deposit ratio across banks. 

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Moreover, higher deposits will ease banks’ deposit costs and likely impact their net interest margins (NIMs) positively as credit demand remains broadly unchanged. SLR demand for the shorter end of the curve would likely improve and with resultant lower probability of OMO purchases in 2HFY24, the yield curve can steepen, it said.

Analysts believe that the need for RBI intervention to manage tight liquidity reduces significantly with this move, depending on the durability and pace of deposit accretion. This would also lower the probability of expected CRR cut and OMO purchases in H2FY24. 

“Rapid pace and limited withdrawals of deposits, may push the RBI to sterilize liquidity given the cautious stance on inflation,” Kotak Institutional Equities said.

Also Read: How will scrapping of ₹2000 banknotes impact Indian economy, banks?

Moreover, the step is also expected to boost consumption of commodities like gold, jewelry, consumer durables and real estate.

“With the bank note remaining a legal tender, unlike demonetization, consumption could see a boost. In fact, notes which are not deposited by individuals (undisclosed income, deposits above certain limits, etc.) could move to high-value spends such as gold/jewelry, high-end consumer durables, and real estate (which then reaches bank deposits),” it added.