In Retrospect

Unwarranted disequilibrium?

Though the decision to withdraw Rs 2,000 notes doesn’t merit comparison with the 2016 demonetisation drive, it still has a destabilising effect on the already suffering economy

Unwarranted disequilibrium?

On May 19, 2023, the Reserve Bank of India (RBI) said it was withdrawing the Rs 2000 currency notes from circulation, claiming it as a part of its currency management. This denomination is no longer commonly used for transactions; besides, there is adequate stock of banknotes in other denominations to meet currency requirements. “In view of the above, and in pursuance of the ‘Clean Note Policy’ of the Reserve Bank of India, it has been decided to withdraw the Rs 2,000 denomination banknotes from circulation,” the RBI said.

The Clean Note Policy seeks to give the public good-quality currency notes and coins with better security features, while soiled notes are withdrawn out of circulation. The RBI had earlier decided to withdraw from circulation all banknotes issued prior to 2005 as they have fewer security features as compared to banknotes printed after 2005. However, the notes issued before 2005 continue to be legal tender. They have only been withdrawn from circulation in conformity with the standard international practice of not having notes of multiple series in circulation at the same time, reports The Indian Express.

These notes were printed and circulated soon after the demonetisation of Rs 500 and Rs 1,000 notes on November 8, 2016. As per the RBI circular, the holders of the notes will be able to exchange them at banks till September 30, 2023. Till then, Rs 2,000 notes will remain legal tender. So, people can continue to use Rs 2000 banknotes for their transactions and also receive them in payments. The RBI Governor said the entire process of withdrawal of the high-denomination currency would be non-disruptive. Banks have clarified that no identity, no forms, and no proof will be required to exchange the Rs 2,000 notes.

The Rs 2,000 notes constitute around 10.8 per cent of total currency in circulation, or Rs 3.6 lakh crore. It may be recalled that the government in November 2016 had junked 86 per cent of the currency in circulation by making Rs 500 and Rs 1,000 notes illegal. Under Section 24 (1) of the RBI Act, 1934, the central bank is empowered to issue notes of any denomination not exceeding Rs 10,000. The Rs 2,000 denomination banknote was introduced on November 8, 2016.

According to RBI, the objective of the introduction of Rs 2,000 note was 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, reports Deccan Herald. Commenting on the withdrawal decision of Rs 2,000 notes, the RBI Governor said, these notes have completed the lifecycle and their purpose has been fulfilled.

Opposing the RBI circular, social activists have lodged PIL in Delhi arguing that as per the provision of the clean note policy of RBI, damaged, counterfeit, or soiled banknote of any denomination can be withdrawn from circulation, and newly printed banknotes are circulated in the market but it is not happening in the present case. Business Today reported that only a denomination of Rs 2,000 is being withdrawn within a specific date/deadline, and no new similar banknote is given by the RBI in circulation.

The total value of Rs 2,000 currency notes was about Rs 7 lakh crore when an in-principle decision was taken in July-August 2017 to not print any more Rs 2,000 notes. As per the May 19 RBI press release, the printing of Rs 2,000 notes was completely stopped in 2018-19.

Exchange process

As per the RBI notification, ten notes of Rs 2,000 denomination can be exchanged at a time at any bank branch or RBI’s regional offices. So, the maximum amount limit per transaction is Rs 20,000. Business Correspondents (BCs) will also be allowed to exchange Rs 2,000 banknotes up to a limit of Rs 4,000/- per day for an account holder. There is no such limit for deposits in the account.

The exchange facility for Rs 2,000 currency notes started on May 23, 2023. It is reported that people appeared to want to get rid of the notes by any means, while different banks adopted different standards for the exchange of notes. People also resorted to various avenues, such as e-commerce deals, fuel stations, supermarkets, and gold purchases to use the notes. While public sector banks, led by State Bank of India (SBI) exchanged notes without any proof or forms, private banks including HDFC Bank and ICICI Bank are asking customers to fill the forms from everyone and sought identity proof from non-account holders, reports The Indian Express.

An India Today investigation reveals that despite the existence of regulations for depositing and exchanging the withdrawn currency within a four-month period, tax evaders and illicit cash networks appear to be operating at full vigour. Certain bullion traders are providing dubious services to exchange the 2,000-rupee notes, effectively assisting individuals with undisclosed money in getting rid of their high-value banknotes at a significantly reduced worth or even swapping them for gold at a higher price. The prevailing ‘service charge’ is stated to be around 7 per cent of the transaction value. Various reports suggest that after the central bank’s announcement, many gold jewellery retail outlets witnessed a constant flow of customers with Rs 2,000 notes to buy the yellow metal. Similarly, the use of Rs 2,000 currency notes at filling stations and restaurants witnessed a steep rise.

Gold prices on Monday saw a rise of Rs 485 per 10 grams and reached Rs 60,760. Last Friday, it was at Rs 60,275. However, it is sold at a premium, while purchased using 2,000 notes. According to the All-India Petroleum Dealers Association, from just 10 per cent before the RBI’s Friday announcement, the share of Rs 2,000 notes in cash transactions at fuel bunks has shot up to 90 per cent. Digital payments, which made up 40 per cent of fuel pumps’ total sales, have contracted to just 10 per cent. Dealers complain of the ‘same difficult situation as was faced during the 2016 demonetisation drive’ and express fears of harassment by tax authorities, reports The Indian Express.

Reasons for withdrawing 2,000 notes

The RBI press release has given three logics for the move. Firstly, the objective of introducing these notes at the time of demonetisation was met as smaller denomination notes became available in larger numbers and the availability of these smaller notes is now adequate for transactions. Secondly, this high denomination is not commonly used for transactions. Thirdly, it is estimated that the lifespan of notes is four to five years. So, these notes issued between 2016 and 2018 have reached their end. It is stated to be a part of the “clean note policy”, reports The Wire. Interestingly the second argument defeats the third argument. If this high denomination note is not commonly used, as suggested by the RBI, then most of these 2,000 notes are unlikely to become dirty which needs urgent replacement!

Nonetheless, it is further argued that RBI’s Friday move is like a ‘remonetisation’ through a ‘give and take’ approach! Though those who are holding such currency in large quantities may not have to explain the source of such large cash if they are depositing or exchanging such notes, many such hoarders would prefer not to reveal their identity. If these notes don’t come back, RBI will demonetise them. This will be a gain for the RBI as they no longer have the liability to pay. As per a report by Bloomberg Quint, this move will remonetise the economy, re-energise businesses, and give the RBI a `hidden’ treasure to help bring down the cost of funds in the system.

It is believed that this move will not inflict any pain on the common citizens of the country. The salaried class, the small shopkeeper, the vegetable vendor, the carpenter, service technicians, and most importantly, the service provided by maids for every household, cleaning vessels and floors, will not be affected. They have moved on; they use UPI through GPay and Paytm. They are all insulated from this move to pull the 2000-rupee note out. So, who will be hit? Hoarders of cash! It’s here that the RBI and the government have given cash hoarders a free run to convert black into white, reports BQ Prime.

This logic is also flawed. Normally, high denomination notes are introduced for ease of transaction as the economy expands and there is inflation. More money is required, especially in India where a large number of transactions are in cash. The Wire reports that there are over six crore micro and small business entities and about 11 crore farmers who use cash for working capital.

Moreover, if it is assumed that those with a substantial amount of black wealth in cash hold an average of Rs 10 crore, and if the entire amount of Rs 3.6 lakh crore is used to hold black wealth, then only 36,000 people will have these notes. However, such notes are also held by other economic agents. So, the numbers holding the Rs 2,000 currency notes as black wealth may not be more than a few thousand. But to curb the black holdings of these few, the whole population of 140 crores would be impacted, most of whom have nothing to do with black incomes or wealth since they earn way below the taxable limit. Instead, the RBI could have just stopped issuing these notes. There was no urgency to take these notes out of circulation and create uncertainty in the economy, argued a report in The Wire.

While the government and the central bank did not specify the reason for the timing of the move, analysts point out that it comes ahead of state and general elections in the country when cash usage typically spikes. Making such a move ahead of the general elections is a wise decision. People who have been using these notes as a store of value may face inconvenience.

Certain political analysts think that perhaps the ruling party has been influenced by the flak it faced during the recently concluded Karnataka elections. The slogan ‘40 per cent ki sarkar’ has dented the image of the ruling party. So, just like demonetisation was used to create a perception that the government is proactive against black money, the same is sought to be done now. It worked in 2016 when the poor accepted that the ruling dispensation was acting against the black money holders. But people also realised that demonetisation did not impact black income generation.

A senior leader of the Congress party and former Union Minister for Finance P Chidambaram said that he was happy at the Union government’s decision to withdraw the Rs 2,000 currency note from circulation to rectify the mistake it had made seven years earlier. Chidambaram said that he expected the Government of India to reintroduce the Rs 1,000 currency note in the market and added that withdrawing Rs 1,000 and Rs 500 currency notes was a grave mistake and not accepted by the people of the country, reports India TV.

Impact on the economy

Echoing the RBI’s logic, Krishnamurthy Subramanian, who was the chief economic advisor from 2018 to 2021, said the move to withdraw Rs 2,000 notes is overall a good one. According to him, as the use of the denomination declined, it is being primarily used to hoard money.

Firstly, the move will help to ferret out a substantive part of the Rs 3.6 lakh crores of Currency in Circulation (CiC) in Rs 2,000 notes currently. As has been observed in several raids, where mountains of currency stored using the Rs 2,000 note were uncovered, all these instances of hoarding of cash involved Rs 2,000 notes. As the use of the Rs 2,000 note as a medium of exchange has declined significantly, it is being used primarily to hoard money. The 80-20 rule suggests that even if 80 per cent of the people are legitimately storing this money in Rs 2,000 notes, they are likely to be storing only 20 per cent of the overall value. 20 per cent of those who are storing the money in Rs 2,000 notes are likely to be hoarders who may account for 80 per cent of the value (~ Rs 3 lakh crore).

Secondly, according to him, the move will not cause inconvenience to common people for five reasons:

* The Rs 2,000 notes are not being used much as a medium of exchange. In fact, they currently constitute only 10.8 per cent of Currency in Circulation (CiC);

* Digital payments are being used in huge numbers for economic transactions. So, the role of physical currency notes, esp. the Rs 2000 note, as a medium of exchange has declined significantly;

* The Rs 500 note (together with digital money) can be used as a medium of exchange to seamlessly substitute even the minimal use of Rs 2,000 note for this purpose;

* Digital transactions are expected to multiply 3x from now to 2026, thereby further minimising the need for the Rs 2,000 note as a medium of exchange in coming years;

* Most importantly, as the RBI has said that Rs 2,000 notes will continue to be legal tender (even beyond September 30, 2023; though RBI may need to clarify this), honest citizens holding Rs 2,000 notes can exchange even beyond the stipulated deadline.

Analysts fear that small businesses and cash-oriented sectors such as agriculture and construction could see inconvenience in the near term. However, as the government has asked people to deposit or exchange the notes for smaller denominations by Sept. 30, bank deposits will rise. This comes at a time when deposit growth is lagging behind bank credit growth. This will ease the pressure on deposit rate hikes. Improved banking system liquidity and an inflow of deposits into banks could mean that short-term interest rates in the market drop as these funds get invested in shorter-term government securities, reports Business Today.


After announcing the demonetisation scheme on November 8, the Central government and RBI came out with 74 notifications and announcements during its execution period of 50 days that included several rollbacks. Though this mini-demonetisation should not be compared with the 2016 demonetisation process when nearly 86 per cent of the currency notes in circulation were withdrawn through a televised announcement at 8 pm, during the last week since RBI’s notification on the withdrawal of 2K-rupee notes, confusion on the modalities on exchanging the notes has emerged between the private and public sector banks.

Such frequent changes in the procedures of the central bank erode the confidence of the citizens in the monetary system of the country. This also corrodes the reception of Indian currency notes in the international market. It is reported that currency exchanges in the UAE have started to shun the Indian rupee, which was readily accepted until the Reserve Bank of India decided to suddenly pull the plug on the Rs 2,000 note. Telegraph reported that travellers from India, who once marvelled at the ease with which they could change wads of Indian currency into riyals and dirhams, are being politely turned away.

At a time when the global economy is passing through a phase of turmoil and every nation is concerned about the stability of their economy and currency, the Indian central bank should avoid such a hasty decision which is inherently destabilising.

Views expressed are personal

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