Last week, shortly after transferring ₹87,416 crore as surplus to the Central Government, the Reserve Bank of India (RBI) withdrew ₹2000 denomination banknotes from circulation. It justified its action saying, “this denomination is not commonly used for transactions” and that the notes are “at the end of their estimated life-span of 4-5 years” and its withdrawal was warranted by the “Clean Note Policy” of the RBI.
The decision and its justification both leave some questions unanswered. For the public, it is a Hobson’s choice.
This withdrawal is being compared to a similar exercise in 2013-14, when notes issued before 2005 were taken out of circulation.
₹2000 currency was introduced under Section 24(1) of the RBI Act, 1934 which simply states that the maximum denomination a note can be is ₹10,000. In November 2016, the ₹2000 notes were issued to replace the ₹500 and ₹1000 notes, which had accounted for 86 per cent of the cash in circulation, to quickly remonetise the economy.
A high denomination note has a life expectancy of 4-5 years because it does not frequently change hands. In other words, a high denomination note by its nature is not supposed to be ‘commonly used’. These notes were not even easily available to general public, either in exchange or from banks.
The central bank has maintained that ₹2000 note will continue to be legal tender which means that these notes are “legally valid for the payment of debts and that must be accepted for that purpose when offered”. During the 2013-14 withdrawal too, RBI had taken the same stance.
According to R Gandhi, a former Deputy Governor of RBI, who was involved in the 2016 demonetisation exercise, “The RBI may come out with a clarification closer to the date about what happens next”. Legal tender status can only be withdrawn by the Central Government.
The stock of ₹2000 rupee with the public was ₹6.57-lakh crore for FY 2016-17 constituting 50.2 per cent of total currency in value terms which peaked at ₹6.73-lakh crore in FY 2017-18 (37.3 per cent in value terms), gradually coming down to ₹3.62-lakh crore as at FY 2022-23, accounting for 10.8 per cent to total banknotes in circulation in value terms.
The printing of these notes was stopped in 2018-19, implying that the decision to withdraw these notes was taken that year itself, even before the denomination ran the course of its estimated life-span! So did the objective of withdrawing these notes go beyond their mere replacement?
Section 27 of the RBI Act, 1934 imposes an obligation on the RBI to maintain the quality of notes by stipulating that the RBI shall not re-issue bank notes which are torn, defaced or excessively spoiled. The “Clean Note Policy” quoted by the RBI in its current withdrawal order had entered the central banking lexicon in January 1999. It recognised the need to withdraw soiled and mutilated currency notes from circulation along with pumping in fresh notes.
In December 2002, the “Clean Note Policy” further prescribed non-stapling of notes which was one of the causes that soiled notes.
The objective of this policy was laudable — to give the citizens good quality currency notes while withdrawing the soiled notes from circulation. But just how did the central bank conclude that the entire stock of ₹2000 notes is soiled, mutilated and unfit to remain in circulation, warranting a mass withdrawal?
It is reported in a section of the press that the RBI’s decision to withdraw this denomination is due to increased fake currency in circulation.
According to the RBI Annual Report 2021-22, counterfeit notes in the denomination of ₹500 and ₹2000 had recorded an increase of 101.9 per cent and 54.6 per cent, respectively, over the FY 2020-21. The moot point is, if the present withdrawal of ₹2000 note has been guided by “security considerations and protecting the currency from concerted onslaught of forgery and counterfeiting”, will the same fate beckon the ₹500 notes in which case counterfeiting is even higher?
Unfortunately, many such questions remain unanswered. The Supreme Court has already ruled that the 2016 demonetisation was legally valid and satisfied the test of proportionality. The present decision is even less likely to be challenged in Courts.
So the onus now is on the central bank to be transparent about its objectives. The press release issued by the RBI could have done better on both counts — explanations and objectives.
There is now a wide consensus that the last demonetisation did not achieve its stated objectives and its implementation led to wide-spread difficulties for common folk and small businesses. Despite the extended deadline provided this time, the market for ₹2000 notes will shrink immediately.
Despite assurance of continuity of legal tender status, transactions in it are likely to be at a discount.
The uncertain fate which awaits these notes after September 2023 further places them in a state of suspended demonetisation. Repeated bouts of demonetisation can also affect the status of currency as a “store of value” and people may gravitate towards the currency of another country which is freely available and has a record of stability.
For a country which is positioning its currency to be globally accepted, any change in policies on currency and payments must be preceded by broad consultation and a better enunciation of objectives and ultimate outcomes than the ones that have been offered.
In the absence of this, political motives will be ascribed to any hastily announced policy and will affect the perceived autonomy and credibility of the central bank, which is a sine qua non if one is aspiring for a global currency status.
The writer is former central banker. Views expressed are personal.