Here’s how withdrawal of Rs 2,000 currency notes will impact economy, equity markets

The Reserve Bank of India (RBI) on Friday announced withdrawal of Rs 2,000 banknotes from circulation with immediate effect. Meanwhile, banks will exchange the high-end currency note up to a limit of Rs 20,000 from May 23, 2023.

About 89 per cent of the Rs 2,000 denomination banknotes were issued prior to March 2017 and are at the end of their estimated life span of 4-5 years, said RBI on Friday.

“The total value of these banknotes in circulation has declined from Rs 6.73 lakh crore at its peak as on March 31, 2018 (37.3 per cent of notes in circulation) to Rs 3.62 lakh crore constituting only 10.8 per cent of notes in circulation on March 31, 2023,” RBI said in a release.

The current decision by the government comes at the time of upcoming general elections in 2024 and state elections later this year.

"Members of the public can continue to use Rs 2,000 banknotes for their transactions and also receive them in payment. However, they are encouraged to deposit and/or exchange these banknotes on or before September 30, 2023," said RBI.

Market analysts believe the decision will not impact the economy and markets this time due to the rapid digitalisation of the payment ecosystem in the country.

Independent market analyst Ambareesh Baliga said, “People, in general, have started using online payment facilities extensively - so don’t see a huge issue like what we saw earlier in 2016.”

Kranthi Bathini, Equity Strategist, WealthMills Securities said: “The move will not impact the market and economy because the circulation of currency is already less. At the same time, the digitalisation payment system is also very strong in the country.”

G Chokkalingam, Founder, Equinomics Research and Advisory said: “It is a brilliant move. Now mostly it is with banks and some quantity maybe with black money hoarders. People with black money will be cornered as the public or common man would hesitate to accept it. This move ultimately would reduce the quantum of black money and help tax collections to improve. Hence, it is a positive development for markets.”

Karthik Srinivasan, Senior Vice President Financial Sector Ratings, ICRA, "As witnessed during demonetisation, we expect the deposit accretion of banks could improve marginally in near term. This will ease the the pressure on deposit rates hikes and could also result in moderation in short-term interest rates."

Watch: Rs 2,000 denomination banknotes withdrawn, will continue as legal tender; What happens to your notes? Know RBI’s advisory on exchange, deposit of Rs 2,000 notes