On May 19, 2023, the Reserve Bank of India (RBI) announced its decision to phase out the circulation of the Rs 2000 note as part of its clean note policy. Banks have been directed by the RBI to cease issuing these notes immediately. The central bank has provided a four-month window, until September 30, 2023, for the public to exchange or deposit any Rs 2,000 notes they possess at bank branches or designated RBI offices. The withdrawal of Rs 2,000 notes did not come as a surprise, considering that the RBI has been gradually reducing the availability of these notes since the demonetization in 2016.
Drawing a Comparison between Demonetization in 2016 and the present move
While some may be inclined to compare the recent withdrawal of Rs 2,000 notes with the 2016 Demonetization initiative, observers argue that such a comparison is fundamentally flawed. This is due to the following reasons:
- During the demonetization, the introduction of the high denomination note was necessary to replenish the currency supply after a significant portion (86%) of the circulating currency was withdrawn. However, the recent withdrawal of Rs 2,000 notes has reportedly aimed at injecting more currency into the system to support the economy.
- The Rs 2,000 note was prone to hoarding by black marketeers during demonetization due to its ease of storage and exchange. As a result, these notes started disappearing from the market, causing banks to face challenges in acquiring an adequate supply. In contrast, the current withdrawal of Rs 2,000 notes does not involve the sudden invalidation of a large portion of the currency in circulation, as was the case in the 2016 demonetization when Rs 500 and Rs 1,000 notes were declared invalid overnight by Prime Minister Narendra Modi.
- Unlike the Rs 500 and Rs 1,000 notes during the demonetization in 2016, the Rs 2,000 notes currently in circulation account for a smaller proportion of the total currency. As a result, it is logical to assume that common people will typically hold smaller quantities of these notes. Consequently, the level of panic and turmoil witnessed during the 2016 demonetization is unlikely to be replicated this time.
However, the Reserve Bank of India (RBI) and the government have not declared the Rs 2,000 notes as invalid during the current withdrawal. The RBI has explicitly stated that these notes will continue to be legal tender, which means they can still be used for transactions. Let us look at the reasons advanced by RBI for Withdrawal of Rs. 2000 notes.
1. The introduction of 2000-rupee notes in 2016 was aimed at rapidly replenishing the currency in circulation in the Indian economy following the demonetization move.
2. The Central bank has consistently expressed its intention to decrease the presence of high-value notes in circulation and has halted the printing of 2000-rupee notes over the last four years.
3. As per the RBI, the 2000-rupee denomination is not widely used for regular transactions.
The effect on economic growth
The current value of Rs.2000 notes in circulation amounts to Rs. 3.62 lakh crore, which constitutes approximately 10.8% of the total currency in circulation. Hence, the withdrawal of these notes is unlikely to cause significant disruptions because sufficient quantities of smaller denomination notes are in circulation, ensuring that there is an ample supply of currency for everyday transactions. Also, over the past 6-7 years, there has been a substantial expansion in the realm of digital transactions and e-commerce. This shift towards digital modes of payment provides alternative options for conducting transactions, reducing the dependence on physical currency.
Effect on Banks
The government's directive to deposit or exchange the Rs. 2000 notes by September 30 is expected to result in increased bank deposits. Furthermore, since all Rs. 2000 notes will be returned to the banking system, it is likely to reduce the amount of cash in circulation, ultimately improving liquidity within the banking system. This is particularly significant as deposit growth has been trailing behind bank credit growth.
The enhanced liquidity and influx of deposits into banks may lead to a decrease in short-term interest rates as these funds are invested in shorter-term government securities.
In summary, the recent action by the RBI aims to gradually phase out the Rs. 2000 note without causing inconvenience to the general public. The focus appears to be on targeting cash hoarders, while those using digital payment methods remain unaffected.
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