Rs 2,000 Note Withdrawal: Storm in a teacup but what purpose did the note serve all these years?

About 89 percent of the Rs 2,000 denomination banknotes were issued prior to March 2017 and are at the end of their estimated lifespan of 4-5 years.

The RBI’s withdrawal of the Rs 2,000 banknote through a routine circular did not send shockwaves that one witnessed during the original demonetisation exercise in November 2016. Perhaps the RBI’s clarification that the note will continue to be legal tender calmed fears.

More Questions Than Answers

But the act and the clarifications accompanying it raises more questions than answers. First, the principal reasons quoted by the RBI for withdrawing the note – adherence to clean note policy (these notes issued in 2016 had reached the end of their life span) and the note not being very popular –  are puzzling in the context.

For one, there are other denomination notes in circulation today which are probably in far worse shape. Also, it is not clear on what basis the RBI determined these notes were not popular or widely used. If it was on the basis of circulation (which declined from Rs 6.73 lakh crore in March 2018 to Rs 3.62 lakh crore by March 2023), the stopping of their printing from 2018-19 could also have been responsible for the decline.

As a percentage of total notes in circulation also, it fell from 37.3 percent in 2018 to 10.8 percent by 2023. Then there is also the statement that the note had achieved its intended purpose (it is not clear if this was mentioned at the time of issue), which was to support the demand for high value currency notes when Rs 100 and Rs 500 notes were demonetised in November 2016.

Rs 2,000 Note A Mistake?

It states that on being satisfied with the adequate availability of other banknotes, it stopped printing of these notes in 2018-19.

The issue of the note itself was riddled with glitches: First, it was “notified” under the wrong Section of the RBI Act and later corrected; secondly, it’s uncommon size required all ATMs countrywide to be recalibrated to accept these notes which further delayed the “remonetisation exercise”. Also, the vaunted superior security features of the new Rs 2,000 note (later to become the subject of memes) were never seen available.

All of this has led many to wonder whether the issuance of the note was a mistake which was now being corrected. The RBI itself has passed this off as a routine exercise stating it has done this in the past as well driven by its “clean note “policy.

Cash Still King

The issue will ultimately pass off as a storm in a teacup and the attention it gets is only because cash is still king in the economy. The unstated purpose of the move according to some, is to ferret out black money especially during election season. This hardly sounds convincing given the failure of the original denomination exercise itself.

As the RBI data show, currency in circulation in value terms soared from Rs 17.74 lakh crore in November 2016 to Rs 29.17 lakh crore by October 2021. To be sure there was a pandemic in between which led to a surge in demand for cash but the co-existence of large cash usage along with an uptick in digital payments is a quirk of India’s economy and not necessarily an indicator of the volume of unaccounted money.

Routine Exercise Made Messy

Many emerging economies also experienced a surge in cash usage attributed to the pandemic, but India’s love for cash goes back a long way. Which is perhaps why in matters relating to money and finance, the obiter dicta accompanying executive action often can be problematic.

By confirming the note will continue to be legal tender and yet prescribing a deadline for surrendering the notes to banks, by setting limits for acceptance of surrendered notes at banks, by instructing banks not to issue further Rs 2,000 notes, the RBI’s actions seem to be only queering the pitch.

With so many uncertainties, it is unlikely that the public will transact in these notes beyond September 2023 with any degree of confidence, despite the assurance of the notes being legal tender. But perhaps since not many of these notes are presently in circulation, we may not witness long queues at banks.

There is also unlikely to be any significant economic impact from the move as was the case when the Rs 1,000 and Rs 500 notes were demonetised.  The timing and the lack of clarity in communication were perhaps what made an otherwise routine exercise messy.