Rs 2000 notes are withdrawn from circulation. (representative)
Bombay:
The decision by the Reserve Bank of India (RBI) to withdraw its highest-denomination note from circulation is likely to improve the liquidity of the banking system, driving down recently raised short-term interest rates, analysts and bankers said.
The RBI said on Friday it will begin withdrawing 2,000 rupee notes from circulation, though they remain legal tender. Customers who have these notes can deposit them or exchange them for smaller notes no later than September 30, 2023.
The value of such banknotes in circulation is 3.6 trillion rupees ($44.02 billion), but not all of this will remain in the form of deposits in banks.
Kotak Institutional Equities estimates that liquidity could improve by about 1 trillion rupees depending on depositor behavior, while QuantEco Research puts the potential liquidity impact at 400 billion rupees to 1.1 trillion rupees.
ICICI Securities Primary Dealership estimates that the excess liquidity could reach 1.5-2 trillion rupees.
The liquidity surplus of the Indian banking system averaged more than 600 billion rupees in May.
Every year, about 2.5 to 3 trillion rupees in liquidity leaks from the banking sector as currency in circulation, wrote Pranjul Bhandari, India’s chief economist at HSBC. “As such, markets can expect some consolation in terms of liquidity.”
Most economists expect the withdrawal of banknotes to be less disruptive to the economy than the demonetization in 2016.
Impact on rates
If excess liquidity improves sharply from this move, “the weighted average call rate could remain below the repo rate for weeks to come,” said Raju Sharma, chief investment officer-debt at IDBI Mutual Fund.
The overnight interbank rate has remained above the policy repo rate of 6.5%.
Short-term interest rates for government securities, bulk deposits with banks and corporate loans are also likely to decline.
There will be good demand for Treasury bill auctions in the coming weeks, said Rajeev Pawar, head of treasury at Ujjivan Small Finance Bank.
This would eventually spill over to three- and five-year bonds and yields on such bonds could fall as much as 10 basis points, he said.
“As liquidity comes in, we expect bullish bets on Indian government bonds to increase across the curve, especially once inflation has eased and rate cuts are priced in,” Sharma said.
(Except for the headline, this story has not been edited by DailyExpertNews staff and is being published from a syndicated feed.)
