RBI’s Rs 2,000 note withdrawal to have little impact on economy

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The Reserve Bank of India’s (RBI) decision to withdraw Rs 2,000 notes from circulation will have a negligible impact on the country’s economy due to the lower share of such notes in circulation as well as the wide window for depositing them, experts said.

“The impact on the economy will be limited,” Indranil Pan, Chief Economist at Yes Bank, told Moneycontrol. “Legitimate transitions always have been going through, and will continue to go through because a very large portion of the cash in the system is not getting affected by this.”

The RBI, on May 19, said Rs 2,000 notes will be withdrawn from circulation and asked banks to stop issuing these notes with immediate effect. The central bank has given four months until September end for the public to exchange or deposit Rs 2,000 notes.

Rs 2,000 notes were introduced after the demonetisation of November 2016 where Rs 500 and Rs 1,000 notes were banned overnight.

“People are trying to put it as a demonetisation. It is not a demonetisation,” YES Bank’s Pan said. “For legitimate transitions, Rs 2,000 was anyways not there in circulation. Whatever Rs 2,000 notes exist at this point in time, is probably in non-banking channels and that is what will get pushed out.”

According to RBI data, the total value of Rs 2,000 notes has declined to Rs 3.62 lakh crore, or 10.8 percent of the notes in circulation, on March 31, 2023, down from Rs 6.73 lakh crore or 37.3 percent, on March 31, 2018.

The note’s circulation was at its peak in the demonetisation period of 2017, when it made up 50.2 percent of the total value of bank notes in circulation, according to QuantEco Research.

“The withdrawal would not have a major impact on economic transactions as it is a small percentage of the currency in circulation in terms of value and also because it is gradual withdrawal,” Yuvika Singhal, Economist at QuantEco Research told Moneycontrol.

Also read: Will Rs 2,000 notes remain legal tender after September 30?

Minor negatives and positives

There could be some sentiment-related negative impact in the very near term till the modalities of exchange settle down, but that would not be big enough to dent the economy, QuantEco’s Singhal said.

“We have to understand that not every hoarder of Rs 2,000 note has the intention of tax evasion. There could be genuine hoarders of Rs 2,000 noteS. Could be old-age persons, housewives.”

The impact could be somewhat larger on cash-intensive sectors such as agriculture, construction, small traders, and Micro, Small and Medium Enterprises (MSMEs), she added.

On the other hand, the economy might actually see an increase in transactions, Yes Bank’s Pan said.

“Like the demonetisation time, it is quite possible that a certain portion of this Rs 2,000 notes is used to buy, say a TV or a mobile, which otherwise the demand would not have come into the system,” he said. “You get higher demand because whoever was hoarding the Rs 2,000 notes would probably be spending it for these purposes.”

Also read: Five reasons why it is wrong to compare Rs 2,000 note withdrawal to demonetisation 2016

Singhal agrees that discretionary spending, especially in urban India on some durables and services, could see a spurt.

Gold, small appliances, home furnishing, mobile phones, and membership services of salons and gyms could receive a shot in the arm, she added.