Published on: May 24, 2023
Source: The Hindu
Recently, the Reserve Bank of India (RBI) announced that it will withdraw the Rs 2000 denomination banknotes from circulation.
While the existing notes will remain legal tender. The RBI has provided a generous timeframe, allowing individuals to deposit or exchange the notes until September 30, 2023.
This move is part of the RBI’s Clean Note Policy, which aims to provide the public with high-quality currency notes and coins with improved security features.
RBI’s Clean Note Policy:
The Clean Note Policy implemented by the Reserve Bank of India (RBI) aims to provide the public with currency notes and coins that have enhanced security features.
The policy focuses on ensuring the availability of high-quality currency while withdrawing soiled or old notes from circulation.
Definition of ‘Soiled Note’:
Under the Clean Note Policy, a ‘soiled note’ refers to a currency note that has become dirty due to normal wear and tear.
It also includes a two-piece note that has been pasted together, where both pieces belong to the same note and no essential features are missing.
Withdrawal of Pre-2005 Banknotes:
The RBI had withdrawn all banknotes issued before 2005 due to their fewer security features compared to banknotes printed after 2005.
However, it is important to note that these older notes are still considered legal tender.
The withdrawal of these notes aligns with international practices and aims to improve the security and integrity of the currency.
Alignment with International Practices:
The Clean Note Policy implemented by the RBI reflects the efforts to align India’s currency practices with international standards.
The focus on enhanced security features helps in preventing counterfeiting and maintaining the authenticity of the currency.
Reasons for RBI’s Withdrawal of 2000 Rupees Notes:
Currency Management Operations:
The withdrawal of 2000 rupees notes by the Reserve Bank of India (RBI) is part of its currency management operations.
The RBI regularly assesses and manages the circulation of different denominations of currency based on various factors.
Introduction and Purpose:
The Rs 2000 banknotes were introduced in 2016 to meet the immediate currency requirements following the demonetization exercise when Rs 500 and Rs 1000 notes were withdrawn.
The objective was to expedite the availability of currency at that time.
With an adequate supply of other denominations available, the printing of Rs 2000 notes was stopped in 2018-19.
The initial objective of meeting the immediate currency requirement was achieved.
Value in Circulation:
As of March 31, 2023, the value of Rs 2000 banknotes in circulation has decreased to Rs 3.62 lakh crore, accounting for only 10.8% of the total notes in circulation.
This decrease indicates a reduced reliance on the 2000 rupees notes.
Impact on Economy:
The withdrawal of 2000 rupees notes is expected to have a very marginal impact on the economy.
With its relatively small share in currency circulation, the withdrawal is not anticipated to cause disruption in normal life or the economy.
Exchange and Deposits:
The exchange limit for Rs 2000 banknotes is set at Rs 20,000 at a time, and non-account holders can also exchange these banknotes at any bank branch.
Deposits into bank accounts can be made without limitations, subject to compliance with Know Your Customer (KYC) norms and regulations.
Economists view the withdrawal of higher-value notes as a sensible form of demonetization.
It could potentially boost bank deposits during a period of high credit growth.
The withdrawal may ease pressure on deposit rate hikes and result in moderation in short-term interest rates.
It is also expected to contribute to curbing black money and reducing corruption.
Legal Tender in India:
Definition and Responsibility:
Legal tender refers to a form of currency that is recognized by law as an acceptable means for settling debts or obligations.
The Reserve Bank of India (RBI) is responsible for determining which forms of currency are considered valid for transactions in India.
Coins and Banknotes:
Legal tender in India consists of coins issued by the Government of India under Section 6 of The Coinage Act, 2011, and banknotes issued by the RBI under Section 26 of the RBI Act, 1934.
The government issues all coins up to ₹1,000 and the 1 Rupee note, while the RBI issues currency notes other than the ₹1 note.
Types of Legal Tender:
Legal tender can be classified as limited or unlimited in character.
In India, coins function as limited legal tender. Coins with denominations equal to or higher than one rupee can be used as legal tender for amounts up to one thousand rupees.
Additionally, fifty paise (half a rupee) coins can be used as legal tender for amounts up to ten rupees.
Banknotes, on the other hand, function as unlimited legal tender and can be used for any amount stated on them.
Restrictions on Cash Transactions:
It is important to note that certain restrictions on cash transactions exist in India. For instance, Section 269ST was added to the Income Tax Act as a measure to curb black money.
This section restricts cash transactions and allows them only up to Rs. 2 lakh per day.