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The Reserve Bank of India’s resolution to withdraw ₹2,000 notes might increase banks’ deposit base and liquidity within the money markets by wherever between ₹40,000 crore to ₹1.1 lakh crore, even when nearly a 3rd of these closely hoarded excessive foreign money notes are flushed out by the train, in accordance to a research report.
An element of these notes that are being hoarded to keep away from taxes on unaccounted incomes might be funnelled into belongings like actual property and jewelry, the report reckons. The central bank has mentioned that the notes will stay authorized tender, however has requested folks holding such notes to deposit or trade them by September 30 this yr.
With no readability but on what the standing of these notes might be after that deadline, a flurry of exchanges is anticipated over subsequent 4 months, which might “rekindle memories of Demonetisation” from 2016, QuantEco Research mentioned in a be aware. Estimating the inventory of ₹2,000 denomination banknotes to be round ₹3.7 lakh crore or 1.3% of GDP — equal to 10.8% of the money in circulation on the finish of March — the be aware mentioned that banks’ deposit base could be bolstered if all of these notes got here again by the stipulated deadline.
Hoarded money
“However, since ₹2,000 denomination notes were not commonly used for transactions, it implies that they were either hoarded for precautionary reasons or for bypassing the formal taxation channel. In either case, the increase in banks’ deposit base on account of its withdrawal from circulation could prove to be temporary as precautionary demand would eventually settle for lower denominations,” QuantEco’s workforce of economists, led by founder Shubhada Rao, identified.
“Unaccounted income might fuel demand for high value consumption items like real estate and precious metals (like the experience post the Demonetization episode in 2016),” they added.
“However, if we assume a scenario where 10%-30% of erstwhile hoarded cash gets back to circulation, then this could have a durable impact on banks’ deposit base and money market liquidity to the extent of ₹400-1,100 billion,” they concluded.
Dividend earnings
Another resolution taken final Friday by the central bank — to switch a hefty ₹87,416 crore to the federal government as dividend, in contrast to round ₹30,300 crore in 2022-23 — would additionally increase liquidity, the report famous. The authorities had solely offered for about ₹48,000 crore as dividend earnings from monetary establishments, together with the RBI, in its 2023-24 Budget.
The transfer supplies a fiscal buffer of about 0.13%-0.15% of GDP to the Centre and can assist mitigate some of the expenditure spillovers that might doubtlessly happen via the yr, it mentioned. “More importantly, this strong dividend transfer would provide a bonanza for core money market liquidity with the central government eventually using this for its expenditure in the coming months,” the report underlined.
