As per the statement issued by the Reserve Bank of India (RBI) on 19th May 2023, the government has decided to withdraw Rs 2000 CURRENCY NOTE from circulation, and the last date of exchange for the Rs 2000 currency note is 30th September 2023. The notes can be exchanged from any bank but at one time you can exchange for only Rs 20,000, ie one can exchange only ten Rs 2000 currency notes at one time. Alternatively one can deposit the available currency notes with you in your bank account, while depositing in your bank account there is no limit.
Post this announcement, social media is abuzz with speculations about the nature of this move with many comparing it with the 2016 mega demonetisation drive. It is fundamentally wrong to compare the withdrawal of Rs 2000 notes with the 2016 demonetisation move. Here are five reasons for this:
1 Unlike demonetization, when Rs 500 and Rs 1000 notes constituting around 86% of currency in circulation at that time were declared invalid overnight by PM Modi, neither the RBI nor the government has declared Rs 2000 notes as invalid this time around. The RBI has clearly said that these bills will remain legal tender, meaning they can be continued for use in transactions. Hence, the value of the notes remains, whereas the Rs 500, and Rs 1000 notes lost value overnight.
2 There is no reason to panic for honest citizens with legit sources for the Rs 2000 notes. There is enough time and facilities offered by the RBI to deposit or exchange these notes in bank branches or authorized RBI centres. There is time till 30th September 2023 for the public to do this. Customers can exchange Rs 2000 notes worth Rs 20,000 at a time starting from 23rd May 2023. Also, there are no restrictions to depositing Rs 2000 notes in your bank account. The RBI has also permitted business correspondents (agents of banks) to exchange Rs 2000 notes up to a limit of Rs 4000 per day for account holders.
3 Unlike Rs 500 and Rs 1000 notes in circulation in 2016, the Rs 2000 notes constitute only a relatively smaller portion of total currency in circulation at this point in time. In other words, common people logically will have only small quantities of these notes. Hence the kind of panic that was visible during earlier demonetization will be unlikely this time around. To give some perspective, according to RBI data, the total value of Rs 2000 notes in circulation has declined to 10.8% of the total as on 31st March 2023. To be more precise, the total value of these banknotes in circulation has declined from Rs 6.73 lakh Cr at its peak on 31st March 2018 (37.3% of notes in circulation) to Rs 3.62 lakh Cr constituting only 10.8% of notes in circulation.
4 The withdrawal of Rs 200 notes was not unexpected. The writing was on the wall. The RBI has not printed new Rs 2000notes since 2018. The RBI has been bringing down the chunk of Rs 2000 notes over the years since the period of demonetization. According to RBI, by volume (number of pieces) from 274 Cr or 2.4% of the total currency in March 2020, Rs 2000 notes have fallen to 214 Cr or 1.6% at the end of March 2022. In value terms, it is already explained in above mentioned point 3.
5 This is not the first time the RBI has withdrawn notes from circulation. There is a precedent for such an exercise as in 2013-14 the RBI had said that it will completely withdraw from circulation all bank notes issued prior to Rs 2005 after March 2014. The RBI gave time till 1st July 2014, post which customers had to submit proof of identity and residence. The RBI conducts such an exercise once in a while as part of its clean note policy. The short point is that the withdrawal of Rs 2000 notes can be compared only to what happened in 2014, rather than the demonetization drive of 2016.
Now if you look into point 3 above, you will notice that more than Rs 3 lakh Cr worth of Rs 2000 notes are lying with people and they are not in circulation. Some small percentage of these not-in-circulation notes might have been spoiled and lost their value. After this exercise, the Rs 2000 notes which are legal to people will come back to banks, and the balance will have to find ways and means to convert into legalized money so that they can be exchanged or deposited in the bank. In a nutshell, there seems to be enough black money lying with people in Rs 2000 currency notes. Now with upcoming State and General Elections, this kind of black money could have been used in dubious ways to lure voters, which is a view expressed by many political pundits.
In the end, there is no reason for the public to panic assuming a repeat of the 2016 demonetisation exercise as bank branches will begin accepting Rs 2000 notes for exchange or deposit from 23rd May 2023. There are four months to get rid of Rs 2000 notes. The RBI has finally drawn the curtains for the pink notes with sufficient precautions and hence the process is not likely to create any chaos.
Waiting for your views on this blog.
Anil Malik
Mumbai, India
22nd May 2023