With the effects of demonetisation continuing to unveil and bring crucial aspects of monetary management to light, many had questioned the Government’s rationale to introduce Rs 2,000 notes.
And, rightly so.
After all, the whole purpose of discontinuing the high-value notes was to curb the circulation of black money and wealth being hoarded in private vaults. The Rs 2,000 note made it easier to perform high-value transactions.
Nearly 8 months on, it seems the introduction of Rs 2,000 notes was a stopgap arrangement. Indeed, it seems authorities are putting their trump card on the table slowly.
If you go to any ATM or a bank branch, there’s definitely a shortage of pink notes. According to latest media reports, the RBI ceased to print Rs 2,000 notes about 5 months ago. At present, it has been supplying Rs 500 as high-value notes and Rs 2,000 notes are sourced only through recirculation within the system.
Let’s understand the arithmetic behind this
As per the RBI data, currency with the public as on June 23, 2017, was Rs 14.5 lakh crore—which was 12.8% lower than the currency holdings with the public on June 23, 2016. There’s been a notable change in the composition of circulated currency as well.
High-value notes becoming less dominant?
| Currency Denomination (Rs) |
Pre-demonetisation |
Post-Demonetisation |
| 2,000 |
0 |
28.8% |
| 1,000 |
38.5% |
0.0% |
| 500 |
47.9% |
43.6% |
| 100 |
9.6% |
20.3% |
| Below 100 |
4.0% |
7.3% |
| Total |
100.0% |
100.0% |
(Source: Hindustan Times, based on SBI Research reports)
As you can clearly see in the table above, the high denomination notes (Rs 500 and Rs 1,000) accounted for 86.4% of the total currency in circulation pre-demonetisation. Post-demonetisation, the contribution of high denomination notes (Rs 500 and Rs 2,000) dropped to 72.4%. In other words, the proportion of lower denomination notes has increased by around 14.0%. It is estimated that the weight of Rs 2,000 notes in the gamut of currency that’s in circulation may eventually drop to 5.0%.
Confirming these claims, Mr Neeraj Vyas, COO, SBI said,
“Presently we are receiving currency notes from the Reserve Bank in the denomination of Rs 500 in high-value currency.”
"The 2,000 denomination notes are coming over the counters by way of recirculation", he further added.
While the RBI is cautious about keeping the Rs 2,000 notes out of circulation (without Government cancelling them), a healthy supply of new Rs 500 notes and much-awaited Rs 200 notes may help bridge the gap.
Moreover, demonetisation is believed to have shored up a deposit base of banks by about Rs 3 lakh crore. In effect, the efficiency of money seems to have improved and as a result, the cost of borrowing has decreased drastically post demonetisation.
Another interesting finding of the recently published report by the SBI’s Economic Research Department is that the ‘cash-in-hand’ position of banks is 5.4% of currency in circulation. During the demonetisation phase, banks held 3.8% cash as a proportion of money in circulation. This excess cash might represent the Rs 2,000 notes lying at ATMs or at bank branches, which might have been kept out of circulation as part of a well thought out strategy.
This is worth investigating further. As this contrasts with the claims of bankers that Rs 2,000 notes are in short supply.
India is hurtling towards becoming a less-cash economy. The evidence is amply clear given the current trends in money circulation and
society’s acceptance of a digital economy. The Income-Tax Department has already placed high-value cash transactions under the scanner. This might discourage people and businesses from transacting in high value denomination notes.
While digitalisation may help curb the
circulation of black money, it’s important for you to be careful while you transact digitally.
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