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Source: The post is based on the article “Return of ₹2,000 currency notes to bolster bank coffers, money market liquidity: report” published in The Hindu on 22nd May 2023
What is the News?
According to a report, the Reserve Bank of India’s(RBI) decision to withdraw ₹2,000 notes from circulation is likely to improve banking system liquidity.
What will be the impact of the withdrawal of Rs 2000 notes?
The value of 2000-rupee notes in circulation is ₹3.7 lakh crore or 1.3% of GDP — equivalent to 10.8% of the cash in circulation.
This withdrawal will not create any big disruption as the increased adoption of digital transactions and the availability of 100 and 500 rupee denominations will help minimize disruptions for individuals heavily reliant on cash transactions.
But small businesses and cash-oriented sectors such as agriculture and construction could see inconvenience in the near term.
How will this decision impact banks?
This decision could boost banks’ deposit base and liquidity in the money markets by anywhere between ₹40,000 crore to ₹1.1 lakh crore, even if just about a third of 2000 rupees notes are flushed out by the exercise.
A part of these notes which are being hoarded to avoid taxes on unaccounted-for incomes could be funneled into assets such as real estate and jewellery.