Banks See Surge in Deposits as Indians Ditch ₹2,000 Notes and RBI Conducts Reverse Repos to Absorb Excess Liquidity

On 19 May 2023, the Reserve Bank of India (RBI) announced the withdrawal of Rs. 2000 denomination banknotes from circulation. The Rs. 2000 denomination note was introduced in November 2016. The stated objective of introducing this high-value currency was to meet the currency requirement of the economy in an expeditious way after the withdrawal of Rs. 500 and Rs. 1000 currency notes in circulation.

From February to April 2023, there was a general increase in both the volume and value of UPI (Unified Payments Interface) transactions compared to the previous month. According to information issued by the RBI on Wednesday, India's currency in circulation fell by 272.8 billion rupees ($3.30 billion) for the week ending June 2. For the week ending June 2, 2023, there were 3.30 billion less rupees ($2.72 billion) in circulation. The withdrawal of ₹2,000 notes from circulation, as well as the rising use of digital payments, are linked to this decrease.

The Reserve Bank of India (RBI) reported in its bulletin that the withdrawal of ₹2,000 notes from circulation and a surge in digital mode of payments caused the currency in circulation, the largest component of reserve money, to fall to 5.3 percent from 8.3 percent in the same period last year.

As of June 9, 2023, reserve money increased 6.8% annually, excluding the first-round effects of increases in the cash reserve ratio (CRR). The total amount of notes that have been deposited or traded as of this moment is not, however, publicly known. More than 80% of the notes received by six public and private sector banks have been put into accounts, while the remaining 20% have been exchanged, according to Reuters. The surge in deposits has led to excess liquidity in the banking system, which has exceeded two trillion rupees since the beginning of June.

Approximately three-fourths of Indians have chosen to deposit the notes into bank accounts thus far rather than exchanging them for currency with lesser values, according to a Reuters. As banks are reluctant to allocate much money for longer duration reverse repos, the market is anticipating the RBI to chose overnight variable rate reverse repos (VRRR), according to Reuters. According to Sandeep Bagla, CEO at Trust Mutual Fund, it is expected that banking system liquidity would gradually increase by one trillion rupees to two trillion rupees over the next few months.