The jury may be still out on the effects of demonetisation but a consensus is developing that it will bring down the interest rate.
Yields on 10-year government bond, a benchmark of the prevalent rate in the economy, have fallen more than 25 basis points since Prime Minister Narendra Modi scrapped Rs 1,000 and Rs 500 notes on November 8.
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Banks opened the next day amid chaos, as people rushed to the branches to exchange their old notes and to withdraw up to the limit of Rs 4,000. The rest of the old notes will go directly to the banks as low-interest-earning current and savings account deposits. The high-value notes made up Rs 14.1 lakh crore of the cash in circulation. If a substantial portion of that comes back to the banks, there will be a massive spike in deposit base.
This will bring down the cost of funds for banks. The lenders are trying to figure out where to put the cash. Therefore, the deposits are being invested in bonds, leading to a spike in the prices of the papers.