The RBI, on May 19, issued a press release announcing that in pursuance of the “clean note policy”, it has been decided to withdraw the ₹2,000 denomination bank note from circulation. The note was introduced in November 2016 to address the process of re-monetisation in the aftermath of demonetisation to “meet the currency requirement of the economy in an expeditious manner”. Since the note will continue as legal tender, this move is not to be confused with demonetisation. Exchange of these notes at any bank branch or RBI offices will continue up to September 30, 2023.

The RBI has clarified that in order to ensure operational convenience and to avoid disruption of regular activities of bank branches, exchange of ₹2,000 bank notes to notes of other denominations can be made up to a limit of ₹20,000 at a time. Since these notes will continue to be legal tender, exchange of these notes even after September 30 may continue. The above cut-off date, however, was fixed by the RBI to “complete the exercise in a time-bound manner”.

It is pertinent to note that in the recent period, such withdrawal was undertaken by the RBI for the second time. As a sequel to the RBI advisory issued on January 2014, the central bank withdrew all bank notes printed prior to 2005 from circulation effective from March 31, 2014.

These notes did not have year of printing on the reverse side, as is the practice now. Since these notes, however, continued to be legal tender, this move is not to be regarded demonetisation.

The lifespan of the ₹2,000 note was anyway up to five years. The RBI stopped printing theses notes from 2018-19. The RBI Annual Report reveals that as on March 2017, the outstanding pieces of ₹2,000 notes were 3,285 million with a value amounting to ₹6,571 billion, which accounted for 50.2 per cent of the total value of currency-in-circulation (₹13,102 billion). However, in terms of volume, it was 3.3 per cent of the total volume of currency-in-circulation (100,293 million pieces).

As on end-March 2022, the volume as also value both declined to 1.6 per cent (21,420 lakh pieces) and 13.8 per cent (₹4,28,394 crore) respectively. The RBI press release of May 19 mentioned that as on March 31, 2023, the outstanding amount of these bank notes stood at ₹3.62-lakh crore, accounting for 10.8 per cent of the total currency-in-circulation. This reduction shows the conscious, deliberate and gradual approach of the RBI to assign less importance to high-value currency. The introduction of digital payment systems has helped facilitate high-value transactions and reduce the dependence on currency notes. Accordingly, the RBI Annual Report 2021-22 observed that the payment systems recorded a robust growth of 63.6 per cent in terms of volume during 2021-22 on top of the expansion of 26.7 per cent in the previous year.

In value terms, the growth was 23.1 per cent as against a decline of 13.4 per cent in the previous year, mainly due to robust growth observed in the large value payment system, namely, RTGS. The share of digital transactions in the total volume of non-cash retail payments increased to 99.3 per cent during 2021-22, up from 98.8 per cent in the previous year. The Annual Report further mentioned that the total turnover of digital payments in value terms was ₹1,744.14-lakh crore as compared with ₹1,414.59-lakh crore in 2020-21. In terms of the volume, the total digital turnover was 7,19,531 lakh as compared with 4,37,455 lakh in 2021. This shows that digital payments have picked up.

Switch to digital

In the above context it is pertinent to mention that a survey conducted by RBI in 2020 of households revealed that their preference for digital payments have increased.

The survey concluded that the pandemic-induced “switch to digital” is likely to be permanent if there are significant changes in the underlying enablers such as enhancement in the payment infrastructure, more merchant on-boarding, reduction in frauds, greater customer trust in digital payments and enhanced ease of use of such payment modes. This would ensure that the recent shift in preferences towards digital payments is not just a temporary spike but a permanent behavioural shift.

One important issue in this context is that these notes are required to be replaced with other bank notes. From the data published by the RBI, we ascertain that the preferred notes for replacement will be ₹500 denomination as the share of these notes is higher at ₹22,77,340 crore accounting for 73.3 per cent of the total.

The total outstanding amount of other denomination notes was lower than the ₹3.62-lakh crore that is required. For example, the outstanding amount of ₹200 denomination bank notes was ₹1,20,881 crore and ₹1,81,421 crore was the outstanding amount in the case of ₹100 denomination bank notes.

There could be a possibility of printing more ₹500 denomination bank notes. To meet this exigency, the RBI has taken sufficient time of four months. However, the efficient delivery of the notes depends on the estimates of the bank branches to make an indent to the currency chest to get the amount.

The bank branches should work efficiently so that hardship is not faced by the public. The RBI has already issued a circular to the banks to this effect.

The writer is a former central banker. Views are personal. Through The Billion Press