How the Removal of India’s 2000 Rupee Note will Impact the Economy, According to a Commentator

The Reserve Bank of India announced that it will stop circulating the highest denomination notes; however, it will not withdraw the 2000 rupee notes introduced in 2016 and will remain legal tender. Citizens have until 30th September 2023 to deposit or exchange these notes. The decision is comparable to the shock move in 2016 when 86% of currency in circulation was withdrawn overnight; however, analysts and economists expect it to be less disruptive this time as lower denomination notes will be withdrawn over a longer period of time. The central bank has not given a reason for the move. Analysts say that the timing of the move typically comes ahead of state and general elections in the country when cash use is increasing.

The 2000 rupee note’s withdrawal will not likely hurt economic growth as there are enough small-volume banknotes available and the growth of digitally deposited accounts and e-commerce has expanded in recent years. The move will increase bank deposits as the government asks citizens to exchange larger notes for smaller denominations, in turn, increasing liquidity in the banking system. An influx of deposits to banks could lead to lower short-term interest rates in the market as these funds are invested in short-term government bonds.

However, people who have used these banknotes as a store of value may face inconvenience, according to Rupa Rege Niture, group chief economist at L&T Finance Holdings. Discretionary purchases such as gold could surge as long as people choose to buy them with large notes instead of depositing them in bank accounts. Nichiren also stated that small businesses and cash-intensive sectors such as agriculture and construction could face inconvenience; however, the impact is likely to be less disruptive than the 2016 move.

Leave a Reply