In a surprise and significant move, the Reserve Bank of India (RBI) announced to withdraw the INR 2000 denomination banknotes from circulation that is only 10.8% of India’s currency in circulation which raises many questions: Is there need to withdraw 2000-Rupee Notes? What are the reasons to withdraw? What will be its impacts on economy, banks and bond markets? Why Now? And is withdrawal of INR 2,000 currency notes a ‘non-event’. These questions need to be answered. Being a student of Economics I would like to put some points before the readers and citizens.
Is it Demonetisation: People are trying to put it as a demonetisation. It is not a demonetisation for legitimate transitions, INR 2,000 was anyways not there in circulation. Whatever INR 2,000 notes exist at this point in time, is probably in non-banking channels and that is what will get pushed out.”
Is there Need of INR 2000 Note: Now there is no need to have a high-denomination note keeping in view the spread of electronic transactions
Why Withdrawal: The INR 2000 note was introduced in November 2016 under Section 24(1) of The RBI Act, 1934, primarily with the objective of meeting the currency requirement of the economy expeditiously after the legal tender status of INR 500 and INR 1000 notes was withdrawn. With the fulfilment of that objective, and once notes of other denominations were available in adequate quantities, the printing of INR 2000 notes was stopped in 2018-19. The RBI issued the majority of the INR 2000 denomination notes prior to March 2017; these notes are now at the end of their estimated lifespan of 4-5 years. 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 INR 2000 denomination banknotes from circulation
Will it create big disruption: this withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity. Also in the past 6-7 years, the scope of digital transactions and e-commerce has expanded significantly
Impacts: The withdrawal of INR 2000 note will neither affect the operation of India’s economic and financial system nor affect total currency in circulation and therefore will have no monetary policy effect. There is going to be zero impact on GDP growth or public welfare due to the lower share of such notes in circulation as well as the wide window for depositing them.
Positive impacts
The economy might actually see an increase in transactions. 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. 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. Scrapping INR 2000-note will ease the pressure on deposit rate hikes and could also result in moderation in short-term interest rates. Economy will get higher demand because whoever was hoarding the INR 2,000 notes would probably be spending it for these purposes. It will nullify the hoarding of INR 2,000 note.
Minor negative Impacts
There could be some sentiment-related negative impact in the very near term till the modalities of exchange settle down, but that would not be big enough to dent the economy. The impact could be somewhat larger on cash-intensive sectors such as agriculture, construction, small traders, and Micro, Small and Medium Enterprises (MSMEs).
Summing up, the Reserve Bank of India’s decision to phase out INR 2000-rupee notes supports the objectives of the ‘Clean Note Policy.’ While the economy may experience temporary effects, the availability of smaller denominations and the growing digital transactions landscape are expected to mitigate disruptions caused by the reduction in cash circulation.
Prof Mithilesh Kumar Sinha
Department of Economics
Nagaland University, Lumami
