Cash With Public Falls By Rs 832.42Bn After RBI Moves To Withdraw Rs 2,000 Note

With Rs 2,000 notes coming back into banks following the Reserve Bank of India decision to withdraw them, cash with the public has fallen by Rs 832.42 billion as on June 2, 2023, according to latest RBI data.

Usually during this time, currency in circulation rises owing to withdrawals amid the sowing season, said an expert. The decision on Rs 2,000 notes, however, has offset this.

On May 19, while announcing the decision to withdraw, the RBI had said the total value of these notes in circulation was Rs 3.62 trillion as on March 31, 2023. Around Rs 1.8 trillion, or 50 per cent of the Rs 2,000 banknotes in circulation have come back to the banking system since the announcement of their withdrawal, RBI Governor Shaktikanta Das said on June 8.

Meanwhile, term deposits of banks rose by Rs 2.68 trillion during the fortnight ended June 2, 2023. They had declined by Rs 39.98 billion in the previous fortnight ended May 19, 2023.

Currency with the public is arrived at after deducting cash with banks from total currency in circulation. Currency in circulation refers to cash or currency within a country that is physically used to conduct transactions.

“Broadly, on a provisional basis, I can say that about 85 per cent of the Rs 2,000 notes are coming back as deposits into bank accounts. This is in line with our expectation,” Das had said. Last month, the RBI said about 89 per cent of the Rs 2,000 denomination banknotes were issued prior to March 2017 and are at the end of their estimated lifespan of four to five years. The printing of these notes was stopped in 2018-19. The RBI has set a deadline of September 30 to deposit or exchange Rs 2,000 banknotes.

HDFC Bank Chief Economist Abheek Barua said the fall in the currency with the public reflects the rise in the deposit of Rs 2,000 notes into banks.

“Typically, in this period there is a lot of cash withdrawal because of the (crop) sowing season. So, currency in circulation usually goes up a little in this period. However, with this (Rs 2,000 bank note deposit) specific phenomenon, it has kind of offset that effect (higher currency with public during sowing season),” he said.

He does not expect a sharp decline in the currency with the public going ahead as a majority of Rs 2,000 notes in circulation have been deposited. “The bulk of it (deposit of Rs 2,000 notes) is done. You might now have a slow period and then the sowing effect could take over and so, you might not see this sharp decline in currency with the public,” Barua said.

On May 29, State Bank of India Chairman Dinesh Khara said his bank has received Rs 2,000 notes worth Rs 140 billion as deposits.

Private lender Kotak Mahindra Bank garnered Rs 54 billion in deposits following the RBIs decision to withdraw Rs 2000 notes from circulation media reported on June 15.

Another state-run lender, Bank of Maharashtra, said it has received Rs 1.28 billion as fresh deposits due to the deposit of Rs 2000 notes.

With cash remaining the preferred mode of payment, currency with the public is up 83 per cent from Rs 17.97 trillion on November 4, 2016, days before the demonetisation was announced.

In fact, the currency with the public is up 261 per cent from Rs 9.11 trillion that was recorded on November 25, 2016, two weeks after Rs 500 and Rs 1,000 notes were withdrawn from the system. The year-on-year rise in cash with the public has been Rs 1.92 trillion as on June 2, 2023.

After Rs 500 and Rs 1,000 notes were withdrawn from the system in November 2016, currency with the public, which stood at Rs 17.97 trillion on November 4, 2016, declined to Rs 7.8 trillion in January 2017. Many say that the sudden withdrawal of notes roiled the economy — with demand falling, businesses facing a crisis and gross domestic product (GDP) growth declining nearly 1.5 per cent. Many small units were hit hard and downed shutters after the note ban as it created liquidity shortage.

Cash in the system has been steadily rising, even though the government and the Reserve Bank of India (RBI) pushed for a “less cash society”, digitisation of payments and slapped restrictions on the use of cash in various transactions. The jump was primarily driven by a rush for cash by the public in 2020 as the government announced a stringent lockdown to tackle the spread of the Covid pandemic. As nations around the world announced lockdowns in February, people began accumulating cash to meet their grocery and other essential needs.

The rise in currency in circulation in absolute numbers is not the reflection of reality. “What needs to be taken into account is the currency to GDP ratio, which had come down after demonetisation,” said a banker.

By INBA Reporter