The Reserve Bank of India (RBI) in a press release, on 19 May, 2023, has declared that Rs. 2000 denomination banknotes will be withdrawn from circulation, citing the reasons as “89% of the Rs. 2000 denomination banknotes were issued prior to March 2017 and are at the end of their estimated lifespan of 4-5 years. The total value of these banknotes in circulation has declined from Rs. 6.73 lakh crore at its peak as on March 31, 2018 (37.3% of notes in circulation) to Rs. 3.62 lakh crore constituting only 10.8% of notes in circulation on March 31, 2023. It has also been observed that this denomination is not commonly used for transactions. Further, the stock of banknotes in other denominations continues to be adequate to meet the currency requirement of the public.” Additionally, the RBI referred to the “Clean Note Policy” that was introduced in 1999, according to which banks and financial institutions are required to withdraw unfit/damaged notes from circulation and replace them with new ones.
While the RBI has declared that the Rs. 2000 notes will be withdrawn from the circulation, at the same time, it has also stated that the Rs. 2000 notes will continue to be legal tender. This has created confusion. Many retail outlets, petrol stations, medical shops are refusing to accept Rs. 2000 notes after the RBI declaration, according to media reports. Nevertheless, probably this time government’s intention was to avoid problems for common people that they faced during demonetization due to the withdrawal status of Rs. 500 and Rs. 1000 notes with immediate effect. Therefore, this time the government is trying to emphasise that the latest announcement is not demonetization but simply an exchange of currency of Rs. 2000 notes. Despite the assurance from the government that there is ample amount of smaller denomination notes for exchange and the imposition of the Rs. 20,000 limit per exchange could stretch the process and impose certain stress in the system.
The introduction of the Rs. 2000 notes after the demonetization exercise that took place in November 2016, and the subsequent ban of Rs. 500 and Rs. 1000 notes and now the repeal of the Rs. 2000 notes seems to impose more costs than gains. The logic of introducing further higher denomination notes (Rs. 2000) than Rs. 1000 was not understood properly, since the objective was to abolish higher denomination notes only. The Rs. 2000 notes accounts for 10.8% of notes in circulation lower from as high as 50.2% in fiscal 2017 when it was introduced after the demonetization of Rs. 500 and Rs. 1000 notes. Right now, we cannot ignore even the possibility of bringing back the Rs. 1000 notes.
One apparent impact of this move would be the increase in bank deposits and in turn liquidity that is likely to lower yields on treasury bills and certificates of deposits. Deposit rates are also likely to come down. On 5 May 2023, the outstanding bank deposits remains at Rs.184.35 crore, whereas the bank credit remains at Rs. 139.04 crore, thus bank deposit to credit ratio is at 1.32, which might increase further.
The retail sector is likely to be affected by the withdrawal of the Rs. 2000 note which could lead to long queues at shops and could also lead to businesses refusing to accept cash payments. The withdrawal of the Rs.2000 note is also likely to have a significant impact on cash-based businesses such as the hospitality industry, the construction industry, and the transport sector. These businesses are likely to face cash shortages and could also face problems in accepting cash payments as well as would impact adversely on the informal sector. The informal sector is a major part of the Indian economy, and it relies heavily on cash transactions. The withdrawal of the Rs. 2000 note is likely to make it more difficult for businesses in the informal sector to operate and could lead to job losses.
Finally, such repeated repeal of banknotes might pose uncertainty in banking systems and particularly in currencies of higher denominations. The central bank or the government should declare beforehand about such rationale to provide a future roadmap in a clear manner to maintain confidence on currencies and the banking system.
Sankhanath Bandyopadhyay is an economist at Infomerics Ratings.