Chart: Why Rs 500, Rs 1,000 notes' circulation surged in over 2 years
Banks have increasingly become unwilling to dispense Rs 100 notes due to logistical issue. Secondly, higher inflation
That the banks have an unenviable task in replacing the high value currencies is clear from just one figure - the proportion of Rs 500 and Rs 1,000 in the currency in circulation, which stands at 86 percent of the total value.
As this report says, banks are going to face daunting task tomorrow when they open the branches. Customers who have Rs 500 and Rs 1000 notes will queue up in front them to deposit their money and exchange.
According to the data available with the RBI (chart below), the number of Rs 500 notes in circulation increased from 1,141 crore as of 31 March 2014 to 1,571 crore as of 31 March 2016, an increase of whopping 38 percent over two years.
Similarly, the number of Rs 1,000 notes rose 24.5 percent from 508 crore to 633 crore during the period. Both the denominations together witnessed a jump of 33.6 percent over the two-year period.
Meanwhile, share of Rs 500 notes as a percent of total currency notes in circulation increased during the period from 14.7 percent to 17.4 percent. The corresponding figures for Rs 1,000 stood at 6.6 percent as of 31 March 2014 and 7 percent as of 31 March 2016.
In value terms, Rs 500 and Rs 1000 notes together account for Rs 14.2 lakh crore, which is 86.4 percent of the total as of 31 March 2016. This is an increase from Rs 10.8 lakh crore (84.1 percent) in fiscal 2014.
According to Madan Sabnavis, chief economist, CARE Ratings, the reason for the increase are two. "For one, the banks were mostly dispensing Rs 500 and Rs 1,000 notes due to the logistical issues related to Rs 100. Secondly, high inflation, especially in food items. Due to the higher prices, people were forced to use higher denominations. After all, what do you get for Rs 100?"
According to Anis Chakravarty, lead economist, Deloitte India, the steps are likely to result in a disruption in the liquidity situation as households will get affected by the note exchange terms as laid by the government.
"Commodity transactions and the general cash market transactions are likely to feel an immediate impact," he said.
On the macroeconomic front, he sees some appreciation of the rupee as the notes in circulation will decrease.
However, there is unlikely to be any impact on the inflation rate as the prices won't come down.
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