Rs 2,000 Note Withdrawal: No demonetisation redux but RBI could have done it better

RBI has finally decided to recall the Rs 2000 note

Like a nightmare resulting from a traumatic experience for a person suffering from PTSD, demonetisation came back to haunt the collective consciousness of this country when the Reserve Bank of India (RBI) decided to recall the 2000 rupee note. Sure, there is an element of exaggeration in the previous statement, but the 2016 demonetisation weighs so heavily on the shared experience of the population that a move by the central bank to recall notes inevitably triggers memories of that episode.

On May 19, the RBI said that it is withdrawing Rs 2,000 notes from circulation, though it will remain a legal tender. Though comparisons are inevitable, this is not quite the same. Unlike the 2016 episode where the 1,000 and 500 notes lost their legal tender status, the RBI has specified that the 2,000 note will continue to remain so. Further, the RBI has given time till September 30 for depositing or exchanging these notes, which is a significant window. Thus, there is no need to panic or form long queues outside bank branches.

Unconvincing Rationale

It is quite difficult to decipher the motivations behind this move. The 2000-rupee note was never meant to be a permanent feature in the wallets of Indian citizens. It was introduced in November 2016 as a stop-gap measure to compensate for the loss of the 500- and 1,000-rupee notes.

As soon as there was enough liquidity and new 500-rupee notes in circulation, the bigger denomination would naturally fade into the background. The RBI had stopped printing the 2000-rupee note in 2018-19 and a majority of the notes in existence were printed prior to March 2017.

RBI’s published FAQ section provides details on the irrelevance of the 2000-rupee note – they were barely used for transaction purposes (legal ones anyway) and there is an adequate supply of other notes that are used instead. The value of Rs 2000 notes circulating in the economy has been steadily falling – from Rs 6.73 lakh crore at its peak on March 31, 2018 (37.3 percent of notes in circulation) to Rs 3.62 lakh crore constituting only 10.8 percent of notes in circulation on March 31, 2023. Finally, the RBI says that the normal lifespan of a note is 4-5 years.

Given all of this – lower transactional use, reduced circulation, being at the end of the natural lifespan and overall irrelevance – one can’t help but question the necessity for pulling the plug instead of allowing it to naturally fritter away? In fact, a simple order to the banks to silently keep depositing the 2,000 rupee note with the RBI when they get it would have done the trick. It is precisely at this point that more sinister motivations about elections and forced distractions are ascribed.

The Ghost Of Demonetisation Past

The RBI and others are quick to point out that it has carried out such an exercise before. In January 2014, the RBI decided to withdraw from circulation all notes issued before 2005 and issued public notices about it. The Bank of England in 2022 similarly withdrew the £20 and £50 paper notes from circulation. In both these cases, however, there is sound justification. There was a significant security upgrade in notes after 2005 and in England, they were switching from paper to polymer notes.

No such justification can be found for the forced removal of the 2000-rupee notes. The biggest difference between the episodes is the obvious trust-deficit and induced anxiety post-demonetisation. The constant chopping and changing of the rules, the shifting goalposts, and the sheer arbitrariness of the rules during demonetisation eroded public trust and reduced currency management in the country to a joke.

To exacerbate the anxiety, the RBI has placed a deadline and a daily limit (10 pieces) for exchanging the notes. This will create confusion about the duration of the legal tender. Expectedly, people and commercial establishments will prefer to err on the side of caution and decline to accept the notes, which will de facto remove the legal tender status of the 2000-rupee note. No amount of RBI notifications can enforce the legal tender status of currency in a low-trust scenario. For instance, a few WhatsApp forwards were enough to relegate the 10-rupee coin to junk status.

For closure, it seems fitting to quote Sir Humphrey Appleby from Yes Minister: if you're going to do this damn silly thing, don't do it in this damn silly way.

Anupam Manur is a professor of economics at the Takshashila Institution, an independent think tank and school of public policy. Views are personal and do not represent the stand of this publication.