Not just bank deposits, gold sales & real estate to get a boost from ₹2,000 note withdrawal

• As much as ₹3.62 lakh crore of bank notes exist in the form of ₹2,000 currency notes, says RBI.
• Of this, as much as ₹1.5-2 lakh crore is expected to make its way to banks as it’s being taken off circulation.
• Since ₹2,000 currency note is still legal tender, a few people might even invest in real estate, gold, consumer durables and more, say analysts.

Indian central bank’s move to withdraw ₹2,000 currency notes from circulation, will help banks, say analysts as it will aid deposit growth and improve system liquidity.

The Reserve Bank of India (RBI) on Friday said that it intends to pull ₹2,000 banknotes from circulation, and gave people four months to either exchange or deposit them at banks.

“Bank Nifty is likely to gain more traction since the ₹2,000 note withdrawal is positive for banks. It will add to the deposits of banks and increase their CASA thereby boosting their bottom line,” said Dr V K Vijayakumar, chief investment strategist at Geojit Financial Services.

Credit growth has been outpacing deposit growth for many quarters now. In FY23, outstanding deposit growth stood at 9.6% while outstanding credit growth stood at 14.6%. In these times, a flood of deposits will help banks.

How much can come from ₹2,000 notes
The ₹2,000 notes were introduced in 2017, after the Government of India went in for demonetization of ₹500 and ₹1,000 notes in November 2016. These notes have served their purpose, said RBI governor Shaktikanta Das in a statement on Monday, and assured people not to rush to banks.

According to RBI, the total value of ₹2,000 banknotes in circulation was ₹6.73 lakh crore at its peak as on March 31, 2018. That’s 37.3% of total notes in circulation. It has dwindled to ₹3.62 lakh crore— and now constitute only 10.8% of notes in circulation as on March 31, 2023.

Of this amount, Kotak Institutional Equities expects as much as ₹1.5-2 lakh crore to make its way into banks as deposits.

“On a net basis, it is likely that deposits will increase by ₹1.5-2 lakh crore. Durable liquidity could increase by around ₹1 lakh crore depending on behaviour of depositors. This should ease the credit-deposit ratio across banks,” said a report by Kotak Institutional Equities.

Further, analysts believe instead of depositing notes in banks people may spend these in buying assets like gold, durables or even real estate property. This money too will indirectly make its way into banks.

“With the bank note remaining a legal tender, unlike demonetization, consumption could see a boost. In fact, notes which are not deposited by individuals (undisclosed income, deposits above certain limits, etc.) could move to high-value spends such as gold and jewelry, high-end consumer durables, and real estate (which then reaches bank deposits),” added the Kotak report.

Besides, some experts say that the rise in deposits may urge the central bank to pause any further hike in interest rates as inflation eases too. A report by Emkay Global says that the deposit surge will ease the current tight liquidity conditions, even if the eventual net deposits remaining with the banking system may be far lower than those seen during demonetization in 2016.

As much as ₹1.1 lakh crore was deposited into bank accounts after demonetization in 2016, adjusting for business as usual or BAU during the same period in FY15-16.

“Some bankers believe incremental deposit build-up may also largely stall any further deposit rate hikes, while it may also precipitate rate roll-down amid increasing signs of early policy rate easing as the inflation trajectory moderates,” said a report by Emkay Global.

SEE ALSO: ₹2,000 note withdrawal – How to exchange them, is it a legal tender and other questions answeredNo need to rush to banks as there’s 4 months time says RBI governor on pulling ₹2,000 notes off circulation