Almost seven years after introducing into the Indian currency denomination, the country’s central bank, Reserve Bank of India (RBI), has decided to withdraw Rs 2,000 banknotes.
The move sent shockwaves as it was reminiscent of the 2016 overnight decision taken by the Narendra Modi government where it had delegitimised older Rs 500 and Rs 1,000 notes— which were about 86 per cent of the economy’s currency in circulation— in a bid to crackdown against black money and corruption.
However, this time the central bank seemed prepared as it had asked the banks beforehand to prepare dedicated facilities whereby people can deposit the Rs 2,000 notes without any problems.
Moreover, unlike in 2016, the decision to remove Rs 2000 notes might have little impact on common people as it values about 10.8 per cent of the currency in circulation, experts believe.
Why did the government withdraw Rs 2,000 notes?
It was introduced primarily to meet the currency requirement of the economy in an expeditious manner after the withdrawal of the legal tender status of all Rs 500 and Rs 1,000 banknotes in circulation at that time.
The objective of introducing Rs 2000 banknotes was met once banknotes in other denominations became available in adequate quantities and therefore, printing of Rs 2000 banknotes was stopped in 2018-19, the RBI said in a press statement.
The central bank had often said that it wants to reduce high-value notes in circulation and had even stopped printing Rs 2000 notes over the past four years.
“This denomination is not commonly used for transactions,” the Reserve Bank of India said in its communication while explaining the decision to withdraw these notes.
A report tabled by the finance ministry in Parliament in December 2022 pointed out that the Rs 2000 denomination in terms of value to the total notes in circulation dipped from 22.6 per cent (March 31, 2020) to 13.8 per cent at the end of March 31, 2022.
The RBI in its annual report in May had also noted a similar trend, saying, “At the end of March 2020, the number of Rs 2000 denomination notes in circulation stood at 274 million, accounting for 2.4 per cent of the total number of currency notes in circulation. The count declined to 245 million or two per cent of the total banknotes in circulation as of March 2021 and further fell to 214 million or 1.6 per cent at the end of last fiscal year.”
But why now?
Neither the central government nor the RBI provided any reason or timing for the move, but experts predict that a significant impact can be seen in the upcoming state and general elections in the country when cash usage usually spikes.
Four states are going to polls this year, in which Narendra Modi’s BJP is ruling one of them.
These states are Madhya Pradesh, Rajasthan, Chhattisgarh and Telangana.
The opposition Congress party helms two states— Rajasthan and Chhattisgarh—, while the regional Bharat Rashtra Samithi party rules southern Telangana.
“Making such a move ahead of the general elections is a wise decision,” Rupa Rege Nitsure, group chief economist at L&T Finance Holdings, told Reuters news agency.
“People who have been using these notes as a store of value may face inconvenience,” she said.
Will it affect banks?
According to the central bank’s directive, people have to deposit or exchange Rs 2,000 notes for smaller denominations by Sept. 30, as a result of which bank deposits will rise.
Since it is still legal tender, the fresh infusion of money will likely boost the bank’s lending capacity, which is currently sluggish.
“This will ease the pressure on deposit rate hikes,” Karthik Srinivasan, group head of financial sector ratings at rating agency ICRA Ltd, told Reuters, adding that the liquidity situation of the banks might also improve.
“Since all the 2000-rupee notes will come back in the banking system, we will see a reduction in cash in circulation and that will in turn help improve banking system liquidity,” said Madhavi Arora, an economist at Emkay Global Financial Services.
Will India’s economy get derailed?
According to RBI, the value of Rs 2000 notes in circulation is 3.62 trillion Indian rupees ($44.27 billion). This is about 10.8 per cent of the currency in circulation.
“This withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity,” Nitsure was quoted as saying.
“Also in the past 6-7 years, the scope of digital transactions and e-commerce has expanded significantly.”
However, some experts predict that small businesses and cash-oriented sectors, such as agriculture and construction, might see inconvenience in the near term.
“To the extent that people holding these notes chose to make purchases with them rather than deposit them in bank accounts, there could be some spurt in discretionary purchases such as gold,” said Yuvika Singhal, an economist at QuantEco Research.
(With inputs from agencies)
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