SBI report says 2000 rupee note withdrawal a non-event; to have favourable impact on deposits and yields

The report authored by State Bank of India’s Group Chief Economic Adviser Dr. Soumya Kanti Ghosh states that the ‘total digital payments’ % to Nominal GDP, it has increased to 767% in FY23 from 668% in FY16, while the retail digital payments (excluding RTGS) as % GDP has reached 242% in FY23 from 129% in FY16.

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 approximately 73% of the total digital payments.

The volume of UPI transactions has increased multi-fold from 1.8 crore in FY17 to 8375 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.

Interestingly, Currency in Circulation (CIC) has moderated to reach 12.4% of GDP in FY23, almost same level as 2015-16. The yearly growth in CIC has also declined to 7.9% in FY23 from 16.6% in FY21, the report said. 

“Our research suggests that Rural and Semi-Urban areas are now accounting for 60% of share in UPI value/ volume, dismantling the popular perception that metro/urban areas are hotbeds of digital payment adoption and innovations,” stated the report.

Top 15 states accounted for nearly 90% of share in value/volume.

UPI has not only altered the payment landscape of India but is also significantly altering the purpose for which currency is used hitherto acting as an investment to speculation (trading) conduit.

The research has found that cash withdrawal through debit cards at ATMs has declined from Nov 18, ceding way to UPI.

“On the basis of monthly time series data analysis for the period of April 2016 to April 2023, it has been observed that every Rs 1 increase in value of UPI transactions leads to 18 paisa decline in debit card transactions, indicating a person is now making a visit to ATM on a an average 8 times a year, down from 16 visits earlier,” stated the report.     

Even though the impact of Rs 2000 rupee note withdrawal is a non-event, there will be a favorable impact on liquidity, bank deposits and interest rates, it said.

“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. We believe that almost the entire amount of Rs 3.6 trillion will come back (nearly Rs 3 trillion excluding the amount in currency chests) to the banking system,” it said.     

Assuming that 10-15% of the total Rs 2000 notes are in currency chests, then of the remaining nearly Rs 3 trillion if we assume MPC of 0.7, nearly Rs 2-2.1 trillion would be spent by the consumers (either direct purchase or by exchanging it with smaller denominations notes), approximately Rs 1 trillion is destined deposits in banks.

Moreover, balance of payment surplus in FY24 is expected to the tune of $1.5-2.0 billion thus providing further liquidity support.   

Importantly, the transitory change in the liquidity would lead to a decline in yields, more at the shorter end of the curve.

“The favourable position in Forward Premia, and the range bound movement in USD/INR also moots aggressive Dollar selling from the Mint street, preferably through S/B swaps in forwards, checkmating any unwarranted depreciation from these levels. We understand there should be a fall of 25-30 bps in money market rates due to incremental deposit flow. This should lead to short-end forward points collapsing which RBI may use to square off its existing short-end positions,” said the report.