India withdraws 2,000-rupee notes: Why the decision won’t have major impact on economy

In a sudden development, the Reserve Bank of India on Friday announced the withdrawal of 2,000-rupee notes. India’s central bank said that the move is a part of its ‘clean note policy’, which entails the withdrawal of soiled notes in circulation. People in India can deposit their 2,000-rupee notes with banks until September 30, 2023, starting Tuesday.

₹2000 Denomination Banknotes – Withdrawal from Circulation; Will continue as Legal Tenderhttps://t.co/2jjqSeDkSk

— ReserveBankOfIndia (@RBI) May 19, 2023

However, the latest move by India’s central bank is unlikely to have the same impact as the 2016 demonentisation, when the Indian economy came to a grinding halt after about 86 percent of the cash in circulation became invalid overnight.  This time around, however, a number of factors may help cushion the impact on the Indian economy.  

First things first. The 2,000-rupee note never really took off in the market. Introduced after the 2016 demonetisation, which invalidated 500-rupee and 1,000-rupee notes, the 2000-rupee note has always had a sense of ‘temporariness’ attached to it.  

Just weeks after the 2016 demonetisation, S Gurumurthy, who later became a Board Member of RBI, had indicated that the 2000-rupee note was a “bridge” to cover the gap in cash flow after the withdrawal of 500-rupee and 1000-rupee notes. 

Gurumurthy had hinted about its eventual withdrawal during an interview with an Indian news channel in December 2016: “…Banks will be told that when you get Rs 2,000 notes, you don’t return them. Slowly, banks will accumulate Rs 2,000 notes and replace them with lower denomination.”  

According to the RBI, 89 percent of the notes were issued before March 2017 and are well past their estimated life span of 4-5 years. The printing of 2,000-rupee notes ceased in 2018-19, clearly pointing to its decline after the new 500-rupee notes and other denominations became adequately available.  

In fact, speculation about the future of the 2,000-rupee note began surfacing in 2020, when several banks started to re-calibrate their ATMs to accommodate more 500-rupee notes.  

Not a popular denomination 

The 2021-22 RBI report shows that the 100-rupee note remains the most-preferred denomination in day-to-day cash transactions. On the other hand, the report showed that 500-rupee note is the most widely-used currency, constituting nearly 35 percent of the total cash volume.  

Clearly, 2,000-rupee notes are not the preferred choice for daily transactions. The 2,000-rupee note has limited use as a medium of exchange as the denomination is too high to be used for daily transactions like buying groceries. It comes as no surprise that the total number of 2,000-rupee notes in circulation stood at just 214 crores in 2022, down from 273 crores in 2020. That’s less than 2 percent of the total cash volume.  

The total value of these banknotes in circulation has declined from Rs 6.73 lakh crore (approximately $82 billion in 2023) in March 2018 to Rs 3.62 lakh crore (about $44 billion in 2023) in March 2023. When expressed in the form of percentages, its value in the total notes in circulation has fallen from 37.3 at its peak in March 2018 to just about 11 percent in March 2023.  

There is also growing anecdotal evidence that the 2,000-rupee note is mostly used for storing ‘black money’, a term used in India to mean unaccounted income. Supporters of the RBI’s latest move have linked it to the fight against corruption. Former RBI deputy governor Rama Subramaniam Gandhi has called the withdrawal a standard practice, telling an Indian business portal that it will “discourage black money accumulation”.  

To make matters worse, the last RBI annual report showed over 50 percent rise in counterfeits of 2,000-rupee notes between 2021 and 2022. 

Rise of digital payments 

When demonetisation was announced in November 2016, digital payments were in their infancy. In October that year, there were over 710 million digital transactions. One of the stated goals of the demonetisation drive was to promote a ‘less cash economy’ through online transactions.  

Six months after demonetisation, this figure rose to over 1.11 billion and has been rising ever since.  

Digital payments, especially via India’s flagship Unified Payment Interface (UPI) system, have grown from 0.10 million transactions worth about $6 million in October 2016 to nearly 8.9 billion transactions worth $172.4 billion in April 2023.  

E-commerce has been playing a huge role in accelerate the push towards UPI payments. According to the ‘2023 Global Payments Report’, cash’s transaction value is expected to fall by 34 percent by 2026, while UPI transaction value is expected to rise by 88 percent by 2026. 

While cash is still the king in India, it may soon lose its crown. According to UK-based data analytics firm GlobalData, the volume of cash in transaction declined from 90 percent in 2017 to about 59 percent in 2021.

There is no direct link between the withdrawal of 2,000-rupee notes and the rising online payments. But it will be safe to assume that the ease of transactions on UPI and other digital payment platforms nullify the need to use the 2,000-rupee note. In short, the note’s weakness as a medium of exchange became its biggest undoing.