By Ira Dugal

MUMBAI (Reuters) -India will withdraw its highest denomination foreign money notice from circulation, the central financial institution mentioned on Friday. The 2000-rupee notice, launched into circulation in 2016, will stay authorized tender however residents have been requested to deposit or alternate these notes by Sept. 30, 2023.

The choice is harking back to a shock transfer in 2016 when the Narenda Modi-led authorities had withdrawn 86% of the financial system’s foreign money in circulation in a single day.

This time, nonetheless, the transfer is predicted to be much less disruptive as a decrease worth of notes is being withdrawn over an extended time frame, in line with analysts and economists.

WHY DID THE GOVERNMENT WITHDRAW 2000-RUPEE NOTES?

When 2000-rupee notes have been launched in 2016 they have been supposed to replenish the Indian financial system’s foreign money in circulation rapidly after demonetisation.

Nevertheless, the central financial institution has continuously mentioned that it needs to scale back excessive worth notes in circulation and had stopped printing 2000-rupee notes over the previous 4 years.

“This denomination will not be generally used for transactions,” the Reserve Financial institution of India mentioned in its communication whereas explaining the choice to withdraw these notes.

WHY NOW?

Whereas the federal government and the central financial institution didn’t specify the rationale for the timing of the transfer, analysts level out that it comes forward of state and common elections within the nation when money utilization usually spikes.

“Making such a transfer forward of the overall elections is a clever resolution,” mentioned Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. “Individuals who have been utilizing these notes as a retailer of worth could face inconvenience,” she mentioned.

WILL THIS HURT ECONOMIC GROWTH?

The worth of 2000-rupee notes in circulation is 3.62 trillion Indian rupees ($44.27 billion). That is about 10.8% of the foreign money in circulation.

“This withdrawal won’t create any massive disruption, because the notes of smaller amount can be found in ample amount,” mentioned Nitsure. “Additionally previously 6-7 years, the scope of digital transactions and e-commerce has expanded considerably.”

However small companies and cash-oriented sectors resembling agriculture and development might see inconvenience within the close to time period, mentioned Yuvika Singhal, economist at QuantEco Analysis.

To the extent that folks holding these notes selected to make purchases with them relatively than deposit them in financial institution accounts, there could possibly be some spurt in discretionary purchases resembling gold, mentioned Singhal.

HOW WILL IT AFFECT BANKS?

As the federal government has requested individuals to deposit or alternate the notes for smaller denominations by Sept. 30, financial institution deposits will rise. This comes at a time when deposit progress is lagging financial institution credit score progress.

This may ease the strain on deposit fee hikes, mentioned Karthik Srinivasan, group head – monetary sector rankings at ranking company ICRA Ltd.

Banking system liquidity will even enhance.

“Since all of the 2000-rupee notes will come again within the banking system, we are going to see a discount in money in circulation and that can in flip assist enhance banking system liquidity,” mentioned Madhavi Arora, economist at Emkay International Monetary Companies.

WHAT ARE THE IMPLICATIONS FOR BOND MARKETS?

Improved banking system liquidity and an influx of deposits into banks might imply that short-term rates of interest out there drop as these funds get invested in shorter-term authorities securities, mentioned Srinivasan.

($1 = 81.7800 Indian rupees)