Economy

Published: May 22, 2023
Updated: May 22, 2023

RBI's Withdrawal of Rs 2,000 Notes to Have Minimal Impact on Economy, Experts Say

The Reserve Bank of India's (RBI) recent decision to withdraw Rs 2,000 notes from circulation is expected to have little effect on the country's economy. Economists emphasize that the limited share of these high-denomination notes in circulation and the extended deposit window will mitigate any significant economic impact. This article provides insights into the implications of the withdrawal, expert opinions, and the potential effects on various sectors.

Negligible Impact on the Economy:

Experts assert that the withdrawal of Rs 2,000 notes will have a minimal impact on the overall economy. Indranil Pan, Chief Economist at Yes Bank, highlights that a substantial portion of the cash in circulation is unaffected by this decision, as legitimate transactions continue to be conducted smoothly. Therefore, the economic consequences are expected to be limited.

Withdrawal Details and Demonetization Comparison:

The RBI announced on May 19 that Rs 2,000 notes would be phased out, with immediate cessation of their issuance by banks. The public has been granted a four-month window until the end of September to exchange or deposit these notes. It is crucial to distinguish this measure from the 2016 demonetization, as experts emphasize that Rs 2,000 notes were not widely circulated for legitimate transactions.

Limited Circulation and Gradual Withdrawal:

According to RBI data, the total value of Rs 2,000 notes has decreased to Rs 3.62 lakh crore, accounting for 10.8% of all notes in circulation as of March 31, 2023. This decline is a considerable reduction from the 37.3% share they held on March 31, 2018. Therefore, given their diminishing presence and the gradual withdrawal process, experts anticipate a minor impact on economic transactions.

Minor Effects and Potential Sectoral Impact:

While there may be some short-term negative sentiment until exchange processes stabilize, economists believe the impact will not be significant enough to harm the economy. Yuvika Singhal, Economist at QuantEco Research, suggests that certain sectors, such as agriculture, construction, small traders, and MSMEs, which heavily rely on cash transactions, might experience a slightly larger impact. However, Singhal emphasizes that not all holders of Rs 2,000 notes hoard them for illicit purposes and highlights the presence of genuine hoarders.

Potential Positives: Increased Transactions and Discretionary Spending:

Contrary to the perceived negative consequences, experts suggest that the withdrawal may lead to increased transactions and discretionary spending. Indranil Pan explains that the money previously hoarded in Rs 2,000 notes might now be utilized for purchasing items like TVs or mobile phones, thereby boosting demand. Yuvika Singhal concurs, noting that urban India may witness a surge in discretionary spending on durables, services, and items such as gold, small appliances, home furnishing, and salon or gym memberships.

Overall, economists believe that the RBI's withdrawal of Rs 2,000 notes will have minimal repercussions on the Indian economy. The lower circulation of these notes and the extended deposit timeframe mitigate any significant economic impact. While there may be some sectoral effects and short-term sentiment fluctuations, the withdrawal is not expected to dent the economy. Moreover, increased transactions and discretionary spending may provide a boost to certain sectors.