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The fundamental value of the rupee

This article discussed the pros and cons of the decision of withdraw of Rs. 2000 currency note from circulation.

What is the context of News?

The Reserve bank of India recently announced to withdraw Rs 2000 denomination currency notes from circulation. However, RBI clarified that the existing currency notes will continue to remain legal tender. That means the liability to pay on demand is continue to exist by last September. The Central bank has issued an advisory to the general public to deposit Rs. 2000 banknotes into their bank accounts and/or exchanged with other denominations at any bank branch.

Why RBI decided to withdraw Rs. 2000 denomination notes?

The Rs. 2000 denomination notes introduced by the government in 2016, under section 24 (1) of the RBI Act, 1934. The primary objective of the initiative, may be to fulfill the gap, emerges out due to demonetization of Rs. 1000 and Rs. 500 currency notes. RBI stopped further printing of the notes when the gap filled in 2019.

Why Central Bank take this decision now?

However, neither the government not the RBI give any specific response regarding the withdrawal. Many analysts highlighted the move  is due to upcoming election, when the cash usage rise. There hoardings increases. If this is the primary objective, the people may will be at beneficial side. People will prefer to invest money into specific institutions.

What may be the impact on Economic Growth?

The current circulation of Rs. 2000 notes is approximately 2.62 trillion Indian Rupee (44.27 billion US Dollar). The number is about 10.8 % of the currency circulation. This number is not much large, hence there may be very limited disruption in the economy. Also, we can presumed that, this decision will boost the growth of digital payments significantly.

Some Economist are saying that the small businesses and cash-oriented sectors such as agriculture and construction may face some discrepancies in operation. Some who may hoard large cash, may prefer to purchase gold or other commodity rather than deposit in banks.

How it will impact Banks?

The currency deposit in large numbers, may rise deposits. This is beneficial as over the time the credit capability of the banks is shrinking. But this initiative may increase the credit growth of the banks. It will also led to decrease of bank rates, also banking system liquidity will rise.

What will the impact on Bond Market?

Rise of bank liquidity levels will result inflow of bank deposits. This means short-term interest rates in the market drop. As it is presumed that these funds get invested in shorted-term government securities.

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