The SBI Research report ‘Ecowrap‘ said that the decision will actually have a favourable bearing on liquidity, bank deposits and interest rates.
The report was released on Tuesday when the 131-day window to exchange junked Rs 2,000 currency notes opened with a mixed bag of small queues and confusion at some banks.
Unlike November 2016, when old 500 and 1000 rupee notes – constituting some 86 per cent of the currency in circulation – were banned overnight, resulting in long queues outside bank branches across the country, this time no crowding is being witnessed.
The report said that almost the entire amount of Rs 3.6 lakh crore in the form of Rs 2,000 will come back to the banking system (the report assumes 10-15 per cent of the total Rs 2,000 notes are in currency chests).
This is partly because of the long window for the exchange of these notes (September 30) and other factors such as the change in the composition of bank notes and rise of digital transactions.
Here are some reasons why removal Rs 2,000 note will be a non-event …
Changing composition of notes
The report said there has been a change in composition of banks notes post demonetisation in 2016.
It said that currency in circulation has moderated to reach 12.4 per cent of GDP in FY23, almost the same level as 2015-16.
The share of small denomination notes (upto Rs 100) in total has declined progressively to 9.0% from 26.7% in 2017 in value terms and to 58.8% from 90.8% in 2017 in volume terms.
Meanwhile, currently Rs 500 note has become the major bank note among the masses and constitutes 73.3% of the total value of currency notes till March 2022.
The report said that the RBI has ensured that the share of the biggest Rs 2,000 note moved down gradually over the years, thus paving their way for the removal from the circulation altogether.
The printing of the notes was stopped in 2018-19.
The share of Rs 2,000 notes had declined to 10.8% of the total value of currency notes or Rs 3.62 trillion by March 23, according to RBI.
“Decoding exchange/deposit dynamics, we understand, banks will already be holding some of these notes in their currency chests, thus the impact on deposits will be limited,” it said.
Rise of UPI
The report further said that in digital payments, India has been witnessing new milestones, in both value and volume terms, which indicate the robustness of its payment ecosystem and acceptance by a wide stratum of consumers.
The report said that the percentage of “total digital payments” to the country’s nominal GDP has increased to 767% in FY23 from 668% in FY16.
The retail digital payments (excluding RTGS) percentage GDP has reached 242% in FY23 from 129% in FY16, it said.
Among all, UPI has emerged as the most popular and preferred payment mode in India pioneering Person to Person (P2P) as well as Person to Merchant (P2M) transactions in India accounting for about 73 per cent of the total digital payments, the report said.
“The volume of UPI transactions has increased multi-fold from 1.8 crore in FY17 to 8,375 crore in FY23. The value of UPI transactions has also increased handsomely, from just Rs 6947 crore to Rs 139 lakh crore during the same period, a jump of 2004 times,” the report said.
UPI popular in rural areas too
The report said that contrary to the popular conception that UPI is only preferred in metro cities, data shows that it is used widely in rural/semi-urban areas too.
“Rural and semi-urban areas account for 60% of share in UPI value/volume. This result is quite astonishing and indicates greater participation of digital means of payment in non-Metro areas and less reliance on cash,” it said.
The report said in the month of April 2023 alone, 414 banks/PPI were live on the UPI interface, with 8.9 billion financial transactions being carried out for a total value of nearly Rs 14.1 trillion, clocking an average ticket size of Rs 1,600.
It further said in the retail demand for money, the share of UPI in value has increased to 83%, while ATM cash withdrawal share declined to 17% in an indication that people are replacing cash with UPI.
“The significance of UPI can be judged from the fact that while the size of GDP has increased by 1.8x to Rs 272 lakh crore in FY23 as compared to FY17, the total ATM transactions value (using Debit card only) has remained constant around Rs 30-35 lakh crore. ATM transactions declining from 15.4% of GDP in FY 17 to 12.1% of GDP in FY 23,” it said.
The study found that both debit card transactions and ATM withdrawals have actually declined due to UPI.
It said that a time series analysis for the period of April 2016 to April 2023 indicates that a person is now making an average of 8 visits to the ATM a year, down from 16 earlier.