The Reserve Bank of India’s decision to withdraw higher denomination notes is expected to have a significant impact on the adoption of the central bank’s retail digital currency project, E-RUPI. As the project moves from its beta-testing phase within the Close User Group (CUG), stakeholder banks are actively preparing to onboard selected merchants and retail individuals onto dedicated apps. With the absence of higher denomination notes, the stage is set for an accelerated adoption of E-RUPI, both alongside physical fiat currency and as a preferred mode for merchant transactions.
On May 19, 2023, RBI announced the withdrawal of Rs 2000 denomination banknotes from circulation as part of its currency management efforts. As of March 2023, Rs 2000 notes accounted for 10.8% of the total currency value, amounting to Rs 3.62 lakh crore. According to RBI Governor’s recent statement on June 8, approximately Rs 1.8 lakh crore of Rs 2000 notes have been returned to the system, with 85% (Rs 1.5 lakh crore) deposited and the remainder exchanged for smaller denominations.
According to a special report from the State Bank of India’s Economic Research Department, even as Rs 1.5 lakh crore of Rs 2000-rupee notes has been deposited at the banks, this implies that the amount spent/exchanged by people over the counter is Rs 60,000 crore (Rs 1.5 lakh crores net of Rs 90,000 crore decline in currency in circulation Rs 60,000 crores). This could also result in a bank deposit boost, repayment of loans boost, consumption boost, RBI retail CBDC boost and a possible GDP boost.
In accounting terms, as the RBI generates liabilities/currency in circulation, it must be matched by the creation of assets / open Market Operations of purchase /sale of Government securities of the same magnitude. Thus, it is most likely that the entire amount will come back into the system. However, the seasonally adjusted decline in currency in circulation during the same period is only around Rs 90,000 crore.
The ‘precision strike’ by RBI hits the right notes on multiple counts, taking pressure off substantially from the near war-like quest for deposits from the banking system while also smoothening the bias for higher interest rates going forward. Additionally, the move effectively anchors the surge in incremental C/D ratio, nearing pre-pandemic levels, by filling the coffers and keeping banks ready to meet funding needs from diverse sectors, as per the SBI report.
The short-term rates (CPs) should ease from upper crest, in alignment with smoothening of benchmark yields while CDs raising by banks to fund the credit/investment demands should also find a rational footing. With overseas markets remaining choppy (further consolidation of mid and small size banks in AEs looks certain going ahead with elevated Fed rates distorting the flimsy equilibrium of yesteryears), Indian banks should get more elbow room to meet the demands from corporates to fund their expansion plans through a mix of credit facilities. Deposit in the banking system through corporates is witnessing smart traction, majorly through bulk deposits, as better returns with liquidity and safety has made bank deposits a favourite alternative for corporates from diverse strata including PSUs and NBFCs.