Experts say that the central bank’s move to withdrawal ₹2000 notes from circulation will benefit banks by encouraging deposit growth and improving liquidity in the system.
Earlier on Friday, the Reserve Bank of India announced it would withdrawal or remove ₹2000 bank notes from circulation and offered people four months to exchange or deposit them.
Bank Nifty may gain more traction because the withdrawal of ₹2000 notes is beneficial for banks. It will add to their deposits, increase their CASA, and boost their bottom line,” said Dr V K Vijayakumar, chief investment strategist at Geojit Financial Services.
In FY23, outstanding credit growth was 14.6%, while outstanding deposit growth was 9.6%. In these times, banks will benefit from a flood of deposits.
2,000 notes were introduced in 2017 after Indian government demonetized ₹500 and ₹1,000 notes in November 2016. In a statement issued on Monday, RBI governor Shaktikanta Das assured people not to rush to the banks, saying these notes have served their purpose.
As of March 31, 2020, the total value of 2,000 bank notes in circulation was 6.73 lakh crore, representing 37.3% of total notes in circulation. It has since declined to 3.62 lakh crore, and represents only 10.8%.
It is expected that 1.5-2 lakh crore of this amount will be deposited with banks as deposits by Kotak Institutional Equities.
According to a report by Kotak Institutional Equities, deposits are likely to increase by 1.5-2 lakh crore. Durable liquidity could increase by around 1 lakh crore depending on depositor behavior.
According to analysts, people may spend these notes instead of depositing them in banks in order to buy assets such as gold, durables, and real estate. This money will indirectly enter the banking system as well.
In contrast to demonetization, the bank note remains a legal tender, so consumption could increase. Kotak reported that notes not deposited by individuals (undisclosed income, deposits above certain limits, etc.) could be used to purchase high-value goods like gold, jewelry, consumer durables, or real estate (and eventually reach bank deposits).
According to some experts, the rise in deposits may also prompt the central bank to pause any further rate hikes as inflation also eases. According to Emkay Global, the deposit surge will ease the current tight liquidity conditions, even if the net deposits remain far lower than those seen during demonetization in 2016.
During the same period in FY15-16, 1.1 lakh crore was deposited into bank accounts after demonetization.
In addition to stalling further deposit rate increases, incremental deposit build-up may also precipitate rate roll-downs amid signs of early policy rate easing as inflation moderates, said an Emkay Global report.