RBI to scrap 2000- rupee note

In light of a recent turn of events, the central bank stated on Friday that India will withdraw its highest denomination banknote from circulation. The Reserve Bank of India (RBI) has decided to withdraw Rs 2000 notes from circulation. But the current notes will continue to be legal tender.

The magenta colored 2000- rupee note, measuring 66 mm to 166 mm, with an image of Mahatma Gandhi along with the Ashokan Pillar emblem on the obverse, and a motif of the Mangalyaan on the reverse along with the logo of Swachh Bharat Abhiyan, came into circulation in 2016. These were made subsidiary to the then demonetization of 500 and 1000- rupee notes. However, the RBI stopped printing Rs. 2000 banknotes in 2018- 2019.

Why did the government decide to withdraw 2000- rupee notes?

The Rs 2,000 note was introduced in November 2016 under Section 24(1) of the RBI Act, 1934, primarily to meet the monetary requirement of the economy after the legal tender status of Rs 500 and Rs 1,000 was withdrawn. With this objective being met and the adequate availability of other denominations to meet currency requirements, the RBI has finally decided to pull the plug on 2000- rupee notes.

“In view of the above, and pursuance of the ‘Clean Note Policy’ of the Reserve Bank of India, it has been decided to withdraw the Rs 2000 denomination banknotes from circulation,” the RBI said.

What is the ‘Clean Note Policy’?

The Clean Note Policy was introduced by the Reserve Bank of India in 2005. It seeks to provide the public with quality notes and coins with better security features, while soiled notes are withdrawn from circulation.

In December 2013, RBI stated as a part of its Clean Note Policy asking banks to exchange soiled notes from non-customers as well and issue only good quality clean notes to the public.

However, notes issued before 2005 continue to be legal tender. They have only been withdrawn from circulation in line with the standard international practice of not having multiple series of notes in circulation at the same time.

History of Demonetization in India!

Demonetization is an initiative of the central government to deal with various crimes, threatening the country’s economy, including black money, and counterfeiting, which then gives way to bigger evils including financing terrorism, drug trafficking, parallel economy, money laundry, and airmail operations.

• Demonetization in 1946: The first demonetization in British India took place on January 12, 1946. Even though C. D. Deshmukh, the then governor of RBI was in opposition to this, the government went ahead with the move and issued an ordinance on January 12, 1946. The decision demonetized currency notes of rupees, 500, 1,000, and 10,000 to account for the unauthorized hoarding of money. Instructions that they could be exchanged for paper money within 10 days were given. By the end of 1947, a total of Rs. 143.97 crore of high-value notes of Rs. 134.9 crore worth of notes were exchanged. Thus, Rs. 9.07 crore notes went out of circulation or were not exchanged.
• Demonetization in 1978: The second demonetization was carried out in the year 1978 following the recommendation of the Wanchoo Committee appointed by the Central Government. The government on January 16, 1978, under the High-Value Bank Notes (Demonetization) Ordinance, 1978 issued Rs. 1,000, Rs. 5,000, and Rs. 10,000 worth of bank notes resorted to be demonetized and people were given three days to exchange their notes. During this demonetization exercise, Rs. 146 crores worth of demonetization, Rs. 124.45 crore worth of currency notes were exchanged and Rs. 21.55 crores or 14.76 percent of demonetized currency notes were extinguished.
• Demonetization in 2016: On November 8, 2016, the Central Government, in the exercise of the powers conferred by Section 26(2) of the RBI Act, notified that Specified Bank Notes (SBNs) would cease to be legal tender from November 9, 2016. According to RBI, Rs. 15.28 lakh crore worth Rs. 500 and Rs. About 99 percent of the Rs 1,000 notes have returned to the banking system. Also, RBI released a new series of Rs 2,000 banknotes.

Effect of ‘This Demonetization’ on Indian Economic Growth

• The monetary value of the 2000- rupee notes in circulation has drastically dropped since FY17. They currently account for 3.62 trillion (lakh crore) INR, which is about 10.8% of currency in circulation.
• Rege Nitsure comments that “This withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity. Also in the past 6-7 years, the scope of digital transactions and e-commerce has expanded significantly.”
• However, small businesses and cash-intensive sectors such as agriculture and construction may see inconvenience in the near term.
• The Government has asked people to exchange their sum containing 2000- rupee notes for smaller denominations, by 30^th This comes at a time when deposit growth is lagging behind bank credit growth. Hence, it will result in improving bank system liquidity.
• Karthik Srinivasan, group head of financial sector ratings at rating agency ICRA Ltd said the improvement in the liquidity of the banking system and the flow of deposits into banks could mean that short-term interest rates in the market fall as these funds invest in short-term government securities.
• A stock market is a collection of companies. So long, as the companies that are part of the Nifty perform well, the index will move upwards. The stock market is a function of companies, not the economy.
• Shankar Sharma, founder of First Global, explained, “Today a big chunk of Nifty earnings is coming from abroad and it is growing at a brisk pace. So, judging Indian equities using the prism of the domestic economy would give you a faulty picture.”

All About Denomination Exchange

• RBI has urged people to approach banks to deposit their 2000- rupee notes in exchange for an equivalent amount in smaller denominations.
• This process shall start from 23^rd May, 2023 and will continue till 30^th September, 2023.
• People can exchange Rs 2,000 notes up to Rs 20,000 at a time. Non-bank account holders can exchange notes up to Rs 20,000 at any time at any bank branch.
• The exchange of 2,000- rupee notes can also be done through business agents at a rate of 4,000 rupees per day for the account holder.

Political Manifestations on the Agenda!

While the government and the central bank did not specify the reason for the timing of the move, analysts point out that it comes ahead of state and general elections in the country, when cash consumption usually rises sharply.

“Making such a move ahead of the general elections is a wise decision. People who have been using these notes as a store of value may face inconvenience,” said Rupa

Rege Nitsure, group chief economist at L&T Finance Holdings.

However, opposition leaders continue to slam the government on this move.

Aam Aadmi Party (AAP) and Delhi government Minister Saurabh Bharadwaj said, “This whole concept of starting the circulation, stopping the circulation of notes, or issuing of new notes, was started by Prime Minister Narendra Modi and the economy suffered due to this. It neither helped in curbing black money nor ending terrorism.”

Former Finance Minister P. Chidambaram took to Twitter to argue that the Reserve Bank of India’s (RBI) decision to withdraw ₹2000 notes from circulation proves their point that the November 2016 Demonetisation was a ‘failed exercise’.

Way Forward

Time shall tell that the decision of the government to demonetize the larger denominations from time to time is a way forward to curb illegal monetary practices or a condescending need for political agendas ahead of the big general elections.

The need of the hour is that the public understands the ups and intellectual benefits of digital transactions. It is a sad reality that even after 7 years of swearing on digitalization and promoting the digital economy, Indians still love to deal in cash.

Although initially, the demonetization move was criticized, now citizens see value in the move. As there are more and more cases of fraud and corruption in the Indian financial sector, demonetization has wiped it out to some extent by bringing online and secure transactions to the fore.

Disclaimer: the above article is based on the following sources of information: The Hindu and Indian Express.