Online transaction to get added push post withdrawal of Rs 2,000 notes from circulation, say experts

UPI

The decision by the Reserve Bank of India (RBI) to withdraw Rs 2,000 banknote from circulation is likely to give an added push to online transactions on the expectation of lower currency leakage, experts said.

This is because when some portion of currency in circulation goes back to the banking system, leads to lower money in circulation that may prompt some people to rely more on the digital transaction, experts added. As per RBI’s data, Rs 2000 Denomination Banknotes were Rs 3.62 lakh crore constituting 10.8 percent of Notes in Circulation on March 31, 2023.

“The move could mean an added push to online transactions or a cashless economy. Going by past experience, demonetization had led to a paradigm shift in digital transactions. Between, FY17 and FY23, the volume of digital transactions in India has increased nearly fourfold,” said Yuvika Singhal, economist, Quanteco Research.

Further, Anil Gupta, Senior Vice President, Co Group Head - Financial Sector Ratings, ICRA, said the rise in currency in circulation is driven by economic growth and while the push for online transactions is desirable, the currency in circulation is expected to grow irrespectively.

According to the RBI Governor Shaktikanta Das’ speech on March 6, the volume of UPI transactions has increased multifold from 0.45 crore in January 2017 to 804 crore in January 2023. The value of UPI transactions has increased from just Rs 1,700 crore to Rs 12.98 lakh crore during the same period.

On the currency leakage front, IDFC First Bank report said If we assume that it takes around 8 months for currency in circulation to rise by Rs 1.8 lakh crore, starting from H2FY24. This implies that full-year currency leakage is likely to be lower by Rs 500 billion.

The report further added that the impact this time around compared to demonization in 2016 is likely to be much lower as the value of Rs 2,000 notes is much lower at Rs 3.6 lakh crore.

“The conversion rate into notes of other denominations would be higher given the entire process is spread over a longer period. If we assume, 50 percent of Rs 3.6 lakh crore is converted into other denominations. This would reduce currency leakage till September 2023 by Rs1.8 lakh crore,” the report added.

Currency with the public refers to cash held with the public rather than being deposited in a bank. The outflow of money from the banking system is known as Currency Leakage and represents currency with public.

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

Rs 2000 Denomination Banknotes – Withdrawal from Circulation

Last week, the RBI decided to withdraw Rs 2,000 banknotes from circulation in pursuance of the “Clean Note Policy”, and it advised banks to stop issuing these notes with immediate effect.

Members of the public were asked to deposit Rs 2,000 banknotes into their bank accounts and/or exchange them for banknotes of other denominations at any bank branch. Deposit into bank accounts can be made in the usual manner, that is, without restrictions and subject to extant instructions and other applicable statutory provisions.

The central bank asked banks to provide a deposit and/or exchange facility of Rs 2,000 banknotes until September 30, to complete the exercise in a time-bound manner and to provide adequate time to the members of the public.

“The facility for exchange of RS 2,000 banknotes up to the limit of Rs 20,000/- at a time shall also be provided at the 19 Regional Offices (ROs) of RBI having Issue Departments1 from May 23, 2023,” RBI said in a release.

Experts on this withdrawal of Rs 2,000 banknotes from circulation said it cannot be compared to the Demonetization episode of 2016.

Also read: Black money finds no mention in RBI Governor Das' address on Rs 2,000 notes

RBI takes on digital payments

The central bank recently has taken various steps for internationalisation of online payments, with the start off with cross-border linkage of fast payment systems of India and Singapore i.e. UPI-PayNow.

This linkage is in addition to the QR code-based and UPI-enabled P2M payments already happening in Bhutan, Singapore and UAE, Das said in a speech.

“Recently, we also enabled the visitors from G20 counties to be onboarded to UPI without having a bank account in India. Through this initiative, the G20 delegates had a first-hand experience of making merchant payments seamlessly through the UPI, during their stay in India,” Das added.