Banking system liquidity to improve post Rs 2,000-note withdrawal, short-term rates may ease: Experts

Currently, liquidity in the banking system is in surplus of around Rs 93,461.40 crore as on May 21, according to the money market operation as on that date (Representative image)

The Reserve Bank of India’s (RBI) decision to withdraw banknotes of Rs 2,000 denomination from circulation is likely to increase the liquidity in the banking system, which may lead to fall in short-term debt instruments rates, experts said.

“On a net basis, it is likely that deposits increase by Rs 1.5-2 lakh crore. Durable liquidity could increase by around Rs1 lakh crore depending on the behaviour of depositors. This should ease the credit-deposit ratio across banks,” said Upasna Bhardwaj, chief economist, Kotak Mahindra Bank.

Madhavi Arora, lead economist at financial advisory firm Emkay Global, said most Rs 2,000 notes are likely to be initially deposited with banks and will improve the deposit base and, thus, the system liquidity by as much as Rs 1.4-1.6 lakh crore.

This is because, as of March 31, 2023, Rs 2,000 notes in circulation constituted Rs 3.62 lakh crore or 10.8 percent of notes in circulation compared to Rs 6.73 lakh crore at its peak in March 2018.

So, considering the return of these funds to the banking system, the deposit base will increase sharply as the RBI has urged people to either exchange or deposit such notes in bank accounts or at branches till September 30.

Earlier on May 22, RBI Governor Shaktikanta Das during an interaction with reporters said they expects most of the Rs 2,000 notes to return to the banking system by September 30. Given this, liquidity will increase substantially, dealers said.

Currently, liquidity in the banking system is in surplus of around Rs 93,461.40 crore as on May 21, according to the money market operation as on that date.

Also read: RBI will ensure adequate liquidity in system, says governor Shaktikanta Das

Impact on rates

The rates or yields on the short-term debt instruments such as commercial papers, certificates of deposit, treasury bills and government securities, among others, will ease once the liquidity in the banking system rises, dealers said.

Treasury dealers expect yields to ease 15-20 basis points (bps) in the coming months. One basis point is one-hundredth of a percentage point.

In the last few weeks, yields on the short-term debt instruments eased after the RBI at its April monetary policy meeting surprised with an unexpected rate pause. Since the RBI’s April monetary policy, yields on papers rated AA and below have fallen 18-34 bps across maturities. Similarly, yields have eased by 15-25 bps on AAA-rated papers.