The Withdrawal of Rs 2,000 Banknotes: Effects on the Economy and Public

The Reserve Bank of India (RBI) has announced its decision to withdraw the largest currency note, the Rs 2,000 banknote, from circulation. While this note will still be considered legal tender, citizens are advised to either deposit or exchange these notes by September 30, 2023.

"The Rs 2,000 banknote was introduced in November 2016 under Section 24(1) of the RBI Act, 1934, with the primary objective of quickly addressing the currency needs of the economy after the withdrawal of the legal tender status of Rs 500 and Rs 1,000 banknotes. However, as the objective was achieved and an ample supply of banknotes in other denominations became available, the printing of Rs 2,000 banknotes ceased in 2018-19. Most of the Rs 2,000 banknotes were issued before March 2017 and are nearing their estimated lifespan of 4-5 years. Besides, it has been observed that this denomination is not commonly used for transactions. Considering these factors and in alignment with the RBI's "Clean Note Policy," it has been decided to withdraw the Rs 2,000 banknotes from circulation.", said the central bank.

Here are some facts stated by the RBI that you should know:

• The RBI has decided to withdraw Rs 2,000 denomination banknotes from circulation in pursuance of the "Clean Note Policy", which ensures the availability of good quality banknotes to the public.

• Citizens do not need to panic as Rs 2,000 banknotes will remain as legal tender. People can continue to use these banknotes for their transactions and accept them as payment. However, it is advisable to deposit or exchange these banknotes by September 30, 2023.

• Citizens have the option to deposit their Rs 2,000 banknotes into their bank accounts and/or exchange them for banknotes of different denominations at any bank branch. The deposit process can be carried out in the usual manner, without any restrictions, and is subject to existing instructions and relevant statutory provisions.

• To ensure smooth operations and prevent any disruption to the regular functioning of bank branches, the exchange of Rs 2,000 banknotes for banknotes of different denominations can be conducted at any bank and/or the 19 Regional Offices (ROs) of the RBI that have Issue Departments.

• Starting from May 23, 2023, individuals (account holders as well as non-account holders) will be able to exchange up to Rs 20,000 at a time.

• Banks have been given instructions to make necessary arrangements in order to minimise any inconvenience faced by senior citizens, persons with disabilities, and other individuals who wish to exchange or deposit Rs 2,000 banknotes.

• To ensure a seamless and convenient process for the general public, a timeframe of more than four months has been provided for the deposit and/or exchange.

• The banks have been advised to stop issuing Rs 2,000 denomination banknotes with immediate effect.

Join Now: PersonalFN is now on Telegram. Join FREE Today to get 'Daily Wealth Letter' and Exclusive Updates on Mutual Funds

But why now?

The withdrawal of Rs 2,000 banknotes seems to have a dual intention, with potential political implications in the lead-up to upcoming state elections and the Lok Sabha elections in 2024. While the move serves broader objectives, it can be seen as a political masterstroke, especially in the aftermath of the BJP's crushing defeat in the Karnataka state assembly elections. By implementing this decision, the government can demonstrate its commitment to financial reforms and create a favourable narrative surrounding its governance ahead of the upcoming electoral contests. The timing of the withdrawal aligns with the political landscape, suggesting a strategic move to regain public support and influence the electoral outcomes.

How will it impact the economy at large?

As per the facts stated by the RBI, the production of Rs 2,000 banknotes was ceased in the fiscal year 2018-19. Approximately 89% of these banknotes were issued prior to March 2017 and have now reached the end of their expected lifespan of 4-5 years. The total value of these banknotes in circulation has declined from Rs 6.73 lakh crore at its peak on March 31, 2018 (accounting for 37.3% of Notes in Circulation) to Rs 3.62 lakh crore, representing only 10.8% of Notes in Circulation as of March 31, 2023.

The demonetisation that took place in 2016 presented a chance to enhance financial inclusion. One of the main initiatives was the opening of bank accounts for individuals who were previously unbanked, along with promoting the adoption of digital payment methods like banking apps and UPI. The subsequent Covid-19 pandemic accelerated the process of digitisation, resulting in India becoming less reliant on cash as a means of transactions. Given this trend, the discontinuation of the Rs 2,000 note is unlikely to have a significant impact, as the country has become less dependent on high-denomination banknotes.

However, the withdrawal of the Rs 2,000 banknotes may have varying impacts on cash-dependent industries such as construction, jewellers, restaurants, and small traders might face challenges in the short term. These sectors often rely on cash transactions, and the discontinuation of a high-denomination note could disrupt their usual cash flow and operations. They may need to adjust their business practices, adopt alternative payment methods, or rely more heavily on lower denomination notes.

On the other hand, banks are likely to see an increase in deposits as individuals deposit their Rs 2,000 banknotes into their accounts or exchange them for other denominations. This influx of deposits can potentially strengthen the liquidity of banks and provide them with additional resources for lending and investment activities.

Will it recreate the 2016 demonetisation disruptions?

The 2016 demonetisation caused widespread disruptions throughout the country. With the sudden withdrawal of 86% of the total currency in circulation, the economy experienced a severe shortage of cash, which led to long queues and limited access to cash as people rushed to banks to exchange or deposit their old notes. However, the current situation is unlikely to result in a similar scenario considering the reduced circulation of these notes and the increased adoption of digital transactions.

Moreover, the central bank is better prepared this time, allowing a generous four-month period for the exchange and deposit of the notes. The relatively smaller value of the Rs 2,000 notes is not expected to create long queues for exchange or cause a cash shortage. The combination of reduced circulation of these notes, digital transactions gaining popularity, and the improved preparedness of the RBI suggests that the disruptions experienced during the 2016 demonetisation are unlikely to be repeated.

How will it impact the common man?

The usage of Rs 2,000 banknotes in everyday transactions was relatively low, indicating that they were not commonly used for day-to-day transactions. However, the significant amount of these banknotes still held by the public implies that they were being utilised as a "store of value". Here's how the RBI move will impact the common man:

• The discontinuation of Rs 2,000 banknotes may initially cause inconvenience for the common man who holds these notes. They may need to exchange or deposit them within the given timeframe, which could require some effort and time.

• As Fixed Deposit (FD) interest rates are likely to come down, individuals who rely on FDs for their investments can expect lower interest rates.

• The move can further encourage the adoption of digital payment methods among the common man. With the reduced availability of high-denomination banknotes, individuals may rely more on digital transactions, mobile wallets, and online payment systems, leading to a more cashless society.

• This can also result in reduced borrowing costs for consumers, making loans more affordable. With decreased lending rates, banks can become more credit-friendly and may be inclined to lend larger amounts to individuals and businesses.

• This, in turn, can stimulate demand for loans and encourage individuals to invest in various avenues like education, housing, entrepreneurship, etc.

• The overall ecosystem can experience a positive impact from this credit uptick, as increased lending and investments can drive economic growth, job creation, and improved opportunities for the common man.

What should a common man do?

As a common man, here are a few actions you should take considering the withdrawal of Rs 2,000 banknotes:

1. If you possess Rs 2,000 banknotes, it is advisable to deposit them into your bank account or exchange them for banknotes of other denominations within the given time frame.

2. With the reduced availability of high-denomination banknotes, consider adopting digital payment methods such as mobile wallets, online banking, and Unified Payments Interface (UPI). Familiarise yourself with these digital platforms and explore their convenience and security features.

3. Ensure you have an adequate supply of lower denomination banknotes for day-to-day expenses and make use of digital payment options whenever possible.

4. With the potential increase in banking activities and credit availability, consider exploring various banking services, such as loans and investments, that can benefit you.

5. Keep yourself informed about any further developments or instructions from the RBI regarding the withdrawal of Rs 2,000 banknotes.

KETKI JADHAV is a Content Writer at PersonalFN since August 2021. She is an MBA (Finance) and has over seven years of experience in Retail Banking. Ketki specialises in covering articles around banking, insurance, personal finance, and mutual funds and has been doing it for over three years now.

Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

Disclaimer: This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision.