Slow Withdrawal
Context:
- Just over seven and a half years after the economically damaging demonetisation of the 500 and 1,000 note, the Reserve Bank of India’s announcement on May 19 that 2,000 banknotes would be taken from circulation has sparked a sense of déjà vu.
Motives behind the withdrawal:
- The printing of Rs 2000 notes was discontinued in 2018–19 once the goal was achieved.
- Prior to March 2017, the RBI issued the majority of the Rs 2000 notes, which are currently nearing the end of their anticipated 4-5 year lifespan.
- Therefore, it has been decided to remove the Rs 2000 denomination banknotes from circulation in accordance with the RBI’s Clean Note Policy.
Clean Note Guidelines:
- Bimal Jalan, who was the governor of the RBI at the time, introduced the policy in 1999.
- With stronger security measures, it aims to provide the public with high-quality currency notes and coins while taking dirty notes out of circulation.
- As part of the policy, the RBI had already decided to stop accepting any banknotes produced before 2005 because of their lack of security safeguards.
Status of Legal Tender:
- The Rs 2000 banknotes will continue to be accepted as legal money despite the withdrawal. They can still be used by people for transactions and paid out to them. The RBI does advise customers to deposit or exchange these notes at bank locations before September 30, 2023, or sooner.
Depositing and Trading:
- People are encouraged to visit bank branches in order to exchange and deposit Rs 2000 bills. For both account holders and non-account holders, there is a restriction of Rs 20,000 for exchanging these notes at once. The ability to deposit money into a bank account is unrestricted, provided that the relevant Know Your Customer (KYC) guidelines and legal procedures are followed.
Results from the withdrawal:
- Liquidity in the short-term banking system will be increased as the withdrawn notes are deposited with banks, creating excess liquidity that will be used for:
- Banks often choose to investing their extra cash in government assets.
- The overnight interbank (call) rate is typically higher than the repo-rate in the overnight money (Call money) market. However, this could alter if the supply of short-term funds suddenly increases.
- Reduced short-term interest rates: Government bond rates will be reduced, initially for t-bills and probably subsequently for 3 and 5 year bonds as well.
- Treasury bills are in more demand, which will drive up the price of government bonds at auctions.
- Cut the bond yield, i.e. Bond yield is the implicit rate at which the face value of the bond is reduced to obtain the current price, which drives up bond prices.
- Cash in circulation will decline since all of the 2000-rupee notes will be redeposited into banks, which will increase the liquidity of those systems.
Conclusion:
- In conclusion, the Reserve Bank of India’s decision to phase out 2000 rupee notes is in line with the goals of the “Clean Note Policy.” While the economy may experience short-term repercussions, the availability of smaller denominations and the expansion of digital transactions are anticipated to lessen the impact of the decrease in cash circulation.
