The SBI Research Report’Ecowrap‘ called that the decision will actually have a positive impact on liquidity, bank deposits and interest rates.
The report was released on Tuesday as the 131-day deadline for exchanging scrap Rs 2,000 notes opened with a mix of small queues and confusion at some banks.
Unlike November 2016, when old 500 and 1000 rupee notes – which account for around 86 per cent of cash in circulation – were banned overnight, causing long queues at bank branches across the country, this time there is no crowding.
The report states that almost the entire amount of Rs.3.6 million is flowing back into the banking system in the form of Rs.2,000 (the report estimates that 10-15 percent of the total Rs.2,000 notes are in cash boxes) .
This is partly due to the long window for the exchange of these notes (September 30th) and other factors such as the change in the composition of notes and the increase in digital transactions.
Here are some reasons why the removal of a Rs 2,000 note will not be an event…
Changing the composition of notes
According to the report, there has been a change in the composition of banknote items demonization in 2016.
It said cash in circulation fell to 12.4 percent of GDP in FY23, almost the same level as in 2015-16.
The share of smaller banknotes (up to 100 rupees) in total has gradually decreased to 9.0% in value from 26.7% in 2017 and to 58.8% in volume from 90.8% in 2017.
Meanwhile, the Rs 500 note has become the mainstream banknote, accounting for 73.3% of the total value of banknotes by March 2022.
The report said the RBI has ensured that the share of the largest Rs 2,000 note has gradually decreased over the years, paving the way for its complete removal from circulation.
The printing of the banknotes was discontinued in 2018/19.
The share of Rs 2,000 notes had fallen to 10.8% of the total value of notes, or Rs 3.62 trillion, by March 23, according to RBI.
“In deciphering exchange rate/deposit dynamics, we know that banks will already be storing some of these notes in their FX chests, so the impact on deposits will be limited,” it said.
Rise of UPI
The report goes on to say that India has seen new milestones in digital payments, both in terms of value and volume, indicating the resilience of its payments ecosystem and adoption by a broad consumer base.
The report said that the share of “total digital payments” in the country’s nominal GDP rose from 668% in FY2016 to 767% in FY23.
The percentage of GDP in retail digital payments (excluding RTGS) reached 23242% in fiscal 2016, up from 129% in fiscal 2016, it said.
Among all, UPI has emerged as the most popular and preferred payment mode in India, and has pioneered person-to-person (P2P) and person-to-merchant (P2M) transactions in India, accounting for about 73 percent of total digital payments , says the report .
“The volume of UPI transactions has multiplied from 1.8 crore in FY17 to 8,375 crore in FY23. The value of UPI transactions has also increased significantly, from just Rs.6,947 crore to Rs.139 lakh crore in the same period, a jump from 2004 times,” the report said.
UPI is also popular in rural areas
The report states that contrary to popular belief that UPI is only preferred in metropolitan areas, data shows that it is also widespread in rural/semi-urban areas.
“Rural and semi-urban areas account for 60% of UPI value/volume. This result is quite astounding and suggests greater digital payment engagement in non-metro areas and less reliance on cash,” it said.
According to the report, in April 2023 alone, 414 banks/PPI were active on the UPI interface, conducting 8.9 billion financial transactions with a total value of nearly Rs.14.1 trillion, which is an average ticket size of Rs.1,600.
It also said that in demand for money at retail, UPI’s share of value has increased to 83%, while ATM cash withdrawals have fallen to 17%, indicating people are substituting UPI for cash.
“The importance of UPI can be judged by the fact that while the size of GDP increased by 1.8 times to Rs.272 lakh crore rupees in FY23 compared to FY17, the total value of ATM transactions (debit card only) however has remained constant at around 2.7 million rupees 30-35 lakh crore. ATM transactions fell from 15.4% of GDP in FY17 to 12.1% of GDP in FY23,” it said.
The study found that both debit card transactions and ATM withdrawals actually decreased due to UPI.
It states that a time-series analysis for the period April 2016 to April 2023 suggests that a person now makes an average of 8 ATM visits per year, up from 16 previously.
