India’s currency in circulation declined for a second straight week after the Reserve Bank of India (RBI) withdrew the largest denomination note in May, requesting people to deposit it with various banks to support lender efforts.
Currency in circulation decreased by 272.8 billion rupees ($3.30 billion) for the week ended 2 June, data released by RBI on Wednesday showed. In the week ended 26 May, it was down by 364.9 billion rupees.
On May 19, the central bank announced that it would begin withdrawing Rs 2000 notes from circulation. People holding those notes were required to deposit them in their respective bank accounts or exchange them for smaller denominations till 30 September.
According to a Reuters report, around three-fourths of Indians had opted to deposit the notes into bank accounts so far instead of exchanging them for smaller denominations.
However, the total amount of notes deposited or exchanged to date is not yet publicly known. Six public and private sector banks said more than 80% of the notes they received had been deposited into accounts and the remaining 20% have been exchanged, reported Reuters.
The surge in these deposits has given a push to the banking system’s liquidity excess, which has stayed above two trillion rupees since the beginning of June. As a result, the RBI has been forced to conduct reverse repos for four sessions in a row.
The market is expecting the RBI to choose overnight variable rate reverse repos (VRRR) as banks are hesitant to mark much money for longer duration reverse repos, reported Reuters.
"It can be safely assumed that the banking system liquidity would increase by one trillion rupees to two trillion rupees gradually over the next few months," said Sandeep Bagla, chief executive officer at Trust Mutual Fund.