India Withdraws the 2000-Rupee Note: What Are the Implications and Why Now?
As India withdraws its 2000-rupee note this year, we discuss the impact on businesses and the country’s banking sector. Unlike the 2016 demonetization announcement, the latest currency note withdrawal will take place over a longer period of time – till September 30.
India’s central bank, the Reserve Bank of India (RBI), announced on May 19 that the 2000-rupee note, the country’s highest denomination currency, will be withdrawn from circulation.
Citizens are advised to deposit or exchange these notes by September 30, 2023. The exchange facility will be available starting May 23 in order to allow banks to make necessary preparations.
This move will likely be less disruptive compared to the 2016 demonetization, as it involves a smaller value of notes and a longer timeframe.
Why is the 2000-rupee note being withdrawn from circulation now?
The decision to withdraw the 2000-rupee notes is aimed at reducing high-value notes in circulation, as they are not commonly used for transactions.
The RBI is also implementing this under its ‘Clean Note Policy’. In fact, by 2018-19, the central bank had stopped printing the 2000-rupee notes after establishing that adequate quantities of banknotes in other denominations were in circulation.
However, the timing of the move, ahead of state and general elections, may be seen as a strategic decision to manage cash usage.
What is the Clean Note Policy?
Banks and financial institutions in India are obligated to replace damaged or unfit notes with new ones as part of the Clean Note Policy. The objective is to ensure the integrity of India’s currency by providing the public with clean, secure, and long-lasting banknotes, while also reducing the risk of counterfeiting.
Why was the 2000-rupee note introduced in 2016?
The 2000-rupee notes were introduced by the RBI to replenish the currency in circulation following the sudden demonetization of the 500-rupee and 1000-rupee currency notes in November 2016. At that time, the two denominations had made up 86 percent of the currency in circulation in India. Hence, the issuance of high legal tender was seen as an expeditious move.
Prime Minister Narendra Modi had made the sudden announcement on the night of November 8 that the 500-rupee and 1000-rupee currency notes would no longer be legal tender from the following midnight. The decision was explained as a measure to curb the circulation of black money and counterfeit currency as well as control inflation.
What are the implications for businesses?
While the latest 2000-rupee withdrawal is not expected to cause major disruptions as had followed the 2016 demonetization move, small businesses and cash-oriented sectors like agriculture and construction in India may face inconvenience in the short term.
Further, the tremendous growth of digital transactions and e-commerce in recent years should mitigate potential disruptions.
Will the banking and financial sector benefit from the currency withdrawal?
The withdrawal will lead to increased bank deposits and improved banking system liquidity, easing pressure on deposit rate hikes, according to financial experts. In the bond markets, the inflow of deposits into banks could lower short-term interest rates as funds are invested in shorter-term government securities.
The value of 2000-rupee notes in circulation is INR 3.62 trillion (US$44.27 billion), which is around 10.8 percent. (US$1=INR 81.78.)
RBI’s Answers to Key Queries on Withdrawal of ₹2000 Banknotes
Q1. Will the 2000-rupee note lose its legal tender status?
Answer: No, the 2000-rupee note will continue to maintain its legal tender status.
Q2. Can the 2000-rupee notes be used for transactions?
Answer: Yes, members of the public can continue to use the 2000-rupee banknotes for their transactions and payments, but are encouraged to deposit and/or exchange these banknotes on or before September 30, 2023.
Q3. What are the facilities available for deposit and currency exchange of the 2000-rupee banknotes?
Answer: All banks in the country will have the facility for account deposit and / or exchange of the 2000-rupee banknotes until September 30, 2023. This facility is also available at 19 Regional Offices of the RBI, which has Issue Departments – also until September 30, 2023.
Deposits into bank accounts can be made without restrictions, provided that individuals adhere to the existing Know Your Customer (KYC) norms and other relevant statutory/regulatory requirements.
Even non-account holders can exchange the 2000-rupee banknotes at any bank branch, with a limit of INR 20,000 at a time.
Further, Business Correspondents (BCs) are authorized to facilitate the exchange of 2000-rupee banknotes. Account holders can exchange these notes through BCs, with a daily limit of INR 4000. A Business Correspondent serves as an extension of a bank branch, offering financial and banking services to customers in areas that are unbanked or underbanked.
Q4. When can the public exchange their 2000-rupee banknotes?
Answer: The exchange facility will be available from May 23, 2023. In order to allow banks to make necessary preparations, the public is requested to visit bank branches or RBI’s Regional Offices (ROs) starting from that date to avail the exchange facility.
Q5. Will there be a cost involved for those seeking currency exchange of their 2000-rupee banknotes?
Answer: There is no fee associated with the exchange facility. It will be provided free of charge.
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