Withdrawal -- Demonitisation 2.0 ?

Not the first time RBI has withdrawn currency from circulation?

?? The RBI recently announced that 2,000-rupee banknotes will be withdrawn from circulation.

Do you know how much does 2000-rupee note make up?

? The total value of these banknotes in circulation has declined from ?6.73 lakh crore to ?3.62 lakh crore & constitutes only 10.8% of all currency.

However, this is not the first time RBI has withdrawn notes. The central bank had taken a similar decision in the year 2013-14??

WHAT HAPPENED IN 2013-14 ??

The RBI in 2014 announced that all notes issued prior to 2005 would be taken out of circulation.

The pre-2005 series of currency has seen the greatest amount of counterfeiting.

??The 2014 decision was to curb the counterfeiting of currency notes, while the 2023 decision is taken in view of RBI's "Clean Note Policy."

?? What is the Clean Note Policy?

The clean note policy was adopted by the RBI to ensure the availability of good quality banknotes to the public. The policy aims to maintain the integrity of the Indian currency by removing damaged, counterfeit, or soiled notes from circulation.

Under the clean note policy, banks & financial institutions are required to withdraw unfit/damaged notes from circulation & replace them with new ones. The RBI regularly monitors the quality of currency notes in circulation & sets standards for their acceptability.

? Why is RBI withdrawing 2,000-rupee currency notes under this policy??

As far as ?2,000 notes are concerned, the RBI started printing them in 2016 after the demonetisation of ?1,000 & ?500 notes.

The objective was met once banknotes in other denominations became available in adequate quantities.

Therefore, printing of ?2,000 banknotes was stopped in 2018-19.

And the RBI recently decided to withdraw the ?2000 note citing "clean note policy" as the reasoning.

?? But is it the actual reason? Doesn’t seem so.

Why did they introduce it if they wanted to withdraw it then??

• Necessity.

The issuance of a high denomination note of ?2,000 was a necessity at the time of demonetisation because the withdrawal of currency impacted 86% of the total currency in the system.

It was not a natural choice to issue such high denomination notes. The ?2,000 notes just helped in pushing more currency into the system to support the economy.

• Hoarding of high denomination notes

The ?2,000 note was encouraging hoarding of high denomination notes by black marketeers as it was easy to store & exchange.

In fact, these notes soon started disappearing from the market. The banks were complaining about not getting enough ?2,000 notes as all banks have had ?recaliberated their ATMs to accommodate ?2,000 notes. This move is basically to get those disappeared notes out.

So, basically what do you infer out of this ?

This note was not used for transactionary purposes rather it was used as "BLACK MONEY" & encourage it as it was easy to store it. The government's goal was to curb black money rather than encourage it.

• Increase of lower denomination ?500 notes

There was always a plan to issue lower denomination note, but that takes time because economy needed the currency back to start normal operations.

Today, these notes constitute only 10% of the total notes of currency in circulation.

• More fake & counterfeit notes

One of the objectives of issuing new notes was to discourage fake & counterfeit notes. Higher denomination was also encouraging the fake & counterfeit industry.

? How will it impact banks ?

• Bank deposits will increase.
• Banking system liquidity will improve.

?? Can we call this a mini-demonitisation then?

Not really.

It is unlikely that bank branches will witness chaos & long queues like in 2016 this time. The printing of ?2000 notes was stopped in 2018-19, & they're no longer commonly seen with the public — unlike the ubiquitous ?500 & ?1000 notes in 2016.

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Dharmik Bakhai

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