On May 19, 2023, the Reserve Bank of India (RBI) made an announcement about withdrawing the Rs 2000 denomination banknotes from circulation. Despite this decision, the existing notes will continue to retain their status as legal tender, up until September 30, 2023. This initiative forms a crucial part of the RBI’s Clean Note Policy, which seeks to provide the public with high-quality currency notes and coins with enhanced security features.
Reason Behind the Withdrawal
The withdrawal, according to the RBI, is part of its currency management operations. The Rs 2000 banknotes were first introduced in 2016, immediately following the demonetization of Rs 500 and Rs 1000 notes. They were meant to meet the urgent requirement for currency at that time. With a sufficient supply of other denominations now available, the printing of these notes was halted in 2018-19. As such, they only make up 10.8% of the total notes in circulation as of March 31, 2023.
Exchanging and Depositing Rs 2000 Notes
The cap on exchanging Rs 2000 banknotes has been set at Rs 20,000 per transaction. Non-account holders have been allowed to exchange these banknotes at any bank branch. Deposits into bank accounts can be done without restrictions, as long as customers comply with Know Your Customer (KYC) norms and other applicable regulations.
Impact on the Economy
The RBI governor stated that the impact of this decision would be highly negligible on the economy since these notes comprise only 10.8% of the total currency in circulation. Economists believe it could lead to an increase in bank deposits during a period of high credit growth and possibly moderate short-term interest rates, thereby curbing black money and corruption.
Exploring the RBI’s Clean Note Policy
The focus of the Clean Note Policy is to provide the public with currency notes and coins with enhanced security features, while phasing out soiled or old notes from circulation. Notes issued before 2005 were withdrawn due to fewer security features as compared to those printed after 2005, in alignment with international practices.
Understanding Demonetization in India
Demonetization is the process of cancelling a currency’s legal tender status. In India, the legal basis for demonetization is provided by Section 26(2) of the Reserve Bank of India Act, 1934. This measure has been defended as a means to stabilize the currency, curb counterfeiting, facilitate trade, and push the informal economy towards more transparency.
Advantages and Disadvantages of Demonetization
Advantages of demonetization include stabilization of currency, control over black money, promotion of digitization, improvement in transparency, and reduction in the cost of printing and managing currency. However, it also has its disadvantages, such as a temporary slowdown in economic activity, significant administrative costs, and potential impacts on cash-driven sectors.
About Legal Tender in India
A legal tender refers to a currency that is recognized by law as an acceptable medium for settling debts or obligations. In India, coins issued under Section 6 of The Coinage Act, 2011, and banknotes issued by the RBI under Section 26 of the RBI Act, 1934, have this status. However, a new section added to the Income Tax Act by the Finance Act 2017 restricts cash transactions to be worth up to Rs. 2 Lakh per day to curb black money.
