The central bank said that India would withdraw its highest denomination currency note from circulation on Friday.
The 2000-rupee note, introduced into circulation in 2016, will remain legal tender, but citizens have been asked to deposit or exchange these notes by September 30, 2023.
The decision is reminiscent of a shock move in 2016 when the Narendra Modi-led government withdrew 86% of the economy’s currency in circulation overnight.
This time, however, the move is expected to be less disruptive as a lower value of notes is being withdrawn over a longer period of time, according to analysts and economists.
When 2000-rupee notes were introduced in 2016, they were intended to replenish the Indian economy’s currency in circulation quickly after demonetization.
However, the central bank has frequently said it wants to reduce high-value notes in circulation and stopped printing 2000-rupee notes over the past four years.
“This denomination is not commonly used for transactions,” the Reserve Bank of India said while explaining the decision to withdraw these notes.
While the government and the central bank did not specify the reason for the timing of the move, analysts point out that it comes ahead of state and general elections in the country when cash usage typically spikes.
“Making such a move ahead of the general elections is a wise decision,” Rupa Rege Nitsure, group chief economist at L&T Finance Holdings, told Time of India.
“People who have been using these notes as a store of value may face inconvenience,” she said.
The value of 2000-rupee notes in circulation is 3.62 trillion Indian rupees ($44.27 billion). This is about 10.8% of the currency in circulation.
But small businesses and cash-oriented sectors such as agriculture and construction could see inconvenience soon, said Yuvika Singhal, an economist at QuantEco Research.
To the extent that people holding these notes chose to make purchases with them rather than deposit them in bank accounts, there could be some spurt in discretionary purchases such as gold, said Singhal.
As the government has asked people to deposit or exchange the notes for smaller denominations by September 30, bank deposits will rise. This comes when deposit growth is lagging behind bank credit growth.
This will ease the pressure on deposit rate hikes, said Karthik Srinivasan, group head – of financial sector ratings at rating agency ICRA Ltd. Banking system liquidity will also improve.
“Since all the 2000-rupee notes will come back in the banking system, we will see a reduction in cash in circulation, and that will, in turn, help improve banking system liquidity,” remarked Madhavi Arora, an economist at Emkay Global Financial Services.
