Recently, the Reserve Bank of India (RBI) announced that it will withdraw the Rs 2000 denomination banknotes from circulation.
GS III: Indian Economy
Dimensions of the Article:
- RBI’s Clean Note Policy
- Reasons for RBI’s Withdrawal of 2000 Rupees Notes
- Legal Tender in India
- 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- The RBI had withdrawn all banknotes issued before 2005 due to their fewer security features compared to banknotes printed after 2005.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to meet the immediate currency requirements following the demonetization exercise when Rs 500 and Rs 1000 notes were withdrawn.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.
-Source: Indian Express