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Replacement, Not Demonetisation: RBI’s Note Withdrawal Does Not Disrupt Economy

RBI’s measure to withdraw ₹2000 notes is the formal phasing out of a denomination pressed into service accidentally.

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The Reserve Bank of India (RBI) estimates the normal lifespan of Indian paper currency notes to be four to five years under its clean note policy. By asserting that about 90% of ₹2000 currency notes which were issued prior to March 2017 are at the end of their productive life, the RBI, on 19 May 2023, decided to withdraw the ₹2000 denomination notes from circulation formally.

The measure has generated some excitement in the media, people, and people who have seen it in light of the highly disruptive demonetisation of ₹500 and ₹1000 currency notes undertaken in November 2016.

The withdrawal of currency notes by RBI is no demonetisation. It is the government which has the authority to withdraw the legal tender status of the currency notes, not the RBI. ₹2000 currency notes will continue to remain perfect legal tender, therefore. RBI’s measures are largely an attempt to nudge people holding these notes to get the same exchanged for other currency notes in circulation.
Snapshot
  • The withdrawal of 2000 currency notes by RBI is no demonetisation. It is the government which has the authority to withdraw the legal tender status of the currency notes, not the RBI.

  • ₹2000 currency note was introduced not as a well thought-out measure but as something which was only available readily to latch on.

  • The process of reducing the circulation of ₹2000 currency notes for its eventual phase-out started soon after demonetisation.

  • The relative importance of ₹2000 currency notes has declined still more. While at the end of March 2017, ₹2000 currency notes constituted over 2/3rd of the currency in circulation, it got reduced to 37.3% by the end of March 2018.

  • The withdrawal of ₹2000 notes from circulation is a non-event and only the formal completion of phasing out of an inappropriate denomination note which was pressed into service at the time of demonetisation mostly for accidental reasons.

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Rs 2000 Denomination Notes: Induction & Withdrawal

The introduction of ₹2000 denomination currency notes at the time of demonetisation in November 2016 was, in a sense, ironical. Demonetisation was undertaken on the premise that high denomination currency notes of ₹1000 and ₹500 were most susceptible to be used for hoarding black money and proceeds of corruption. Yet, the government used a much higher denomination note of ₹2000 to reflate the depleted currency in circulation when 86% of the currency was illegitimised in one stroke.

₹2000 currency note was introduced not as a well thought-out measure but as something which was only available readily to latch on. The government had perhaps, approved the printing of ₹2000 currency notes a few months before demonetisation to introduce a higher denomination note.

The fate ₹2000 currency note was sealed even before it was introduced. It had to make its way out as soon as possible.

The RBI, in its press release, has also noted that the ₹2000 currency note was introduced in November 2016 primarily to meet the currency requirement of the economy in an expeditious manner after demonetisation.

The RBI has further noted that the objective of introducing ₹2000 banknotes has been met, and its utility is over, once the currency notes in other denominations became available in adequate quantities. In simple words, ₹2000 notes had become redundant as part of the currency in circulation.
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Phasing Out Started Post Demonetisation

The process of reducing the circulation of ₹2000 currency notes for its eventual phase-out started soon after demonetisation. The total value of ₹2000 currency notes was about Rupees seven lakh crore when an in-principle decision was taken in July-August 2017 not to print any more ₹2000 currency notes.

A small quantity of ₹2000 currency notes were printed in March-April 2018 to tide over the mini currency notes shortage crisis at that time. As the RBI press release notes, the printing of ₹2000 banknotes was completely stopped in 2018-19. With the stoppage of printing of the currency notes of ₹2000, the path of elimination of these notes was firmly secured. The government printed much larger than normally required ₹500 currency notes in 2018-19 to facilitate the withdrawal of ₹2000 currency notes, whenever the government formally decided to bid goodbye to these notes.

A gradual process of slow releasing the ₹2000 notes started, thereafter. A good part of the notes received by the banks in their normal operation was returned to RBI for destruction. Gradually, banks stopped delivering ₹2000 currency notes to people through counters or ATMs. A few months back, the banks started removing the ₹2000 tray from the ATMs. As a result, the quantum of ₹2000 currency notes in circulation came down substantially. RBI has also noted in its press release that the total value of ₹2000 banknotes in circulation had declined from ₹6.73 lakh crore at its peak of 31 March 2018 to ₹3.62 lakh crore.

The relative importance of ₹2000 currency notes has declined still more. While at the end of March 2017, ₹2000 currency notes constituted over 2/3rd of the currency in circulation, it got reduced to 37.3% by the end of March 2018. ₹2000 currency notes constituted only 10.8% of notes in circulation on 31 March 2023, as the RBI has noted. The RBI has further, rightly observed that ₹2000 currency notes denomination has not been commonly used for transactions.
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Continuance As Legal Tenders

The withdrawal of ₹2000 currency notes on 19 May constitutes the last step in the terminal journey of the ₹2000 currency notes. By the end of September (possibly even much before), almost all the remaining ₹2000 currency notes in circulation would find their way to the RBI and these notes will become a history in the annals of the Indian currency system.

The measure has raised certain collateral issues in the minds of people. First, such an issue relates to the process of rendering these notes held by people to the RBI. As the ₹2000 currency notes will continue to be legal tender, people can use these notes for making payments to the government, businesses, and for services in the normal course or deposit these in their bank accounts or exchange them for other denomination notes from 23 May 2023.

There is unlikely to be any panic, hurry or worry in this process. It is quite easy to expect almost all the ₹2000 currency notes in circulation to come back to the RBI. There is unlikely to be any inconvenience or loss to anyone.
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₹2000 currency notes form a small part of the currency in circulation and are not widely used for day-to-day transactions. Moreover, a lot of payments have shifted to digital modes in the last five-six years in India, in line with the global trend. The withdrawal of ₹2000 currency notes, which is actually replacement by other denominations, will not affect total currency in circulation and therefore, will have no monetary policy effect. Neither will it affect operation of India’s economic and financial system. There is going to be zero impact on the GDP growth or public welfare.

The withdrawal of ₹2000 currency notes from circulation is a non-event and only the formal completion of phasing out of an inappropriate denomination note which was pressed into service at the time of demonetisation mostly for accidental reasons.

(The author is the former Finance and Economic Affairs Secretary, Government of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)

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