Withdrawal of Rs 2000 notes: The short history of a large note

Source: The post is based on the article “The short history of a large note” published in The Hindu on 31st May 2023

Syllabus: GS – 3: Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment.

Relevance: About RBI’s decision to withdraw Rs 2,000 notes.

News: The Reserve Bank of India (RBI) has decided to withdraw the Rs 2000 denomination banknotes from circulation.

Why has the RBI withdrawn Rs 2,000 notes?

What are the issues faced in the economy with Rs 2,000 notes?

The credibility of the monetary system: India’s monetary system has taken a serious credibility hit due to frequent changes and U-turns in currency management.

Automated Teller Machine (ATM) Recalibration: During demonetisation, the 2000 notes had to be printed in larger numbers. The RBI printed the new ₹2,000 notes in a new size. Normally, an ATM contained four cassettes; two cassettes held ₹500 notes and the other two cassettes held ₹1,000 and ₹100 notes. The new ₹2,000 note would not fit into any of these cassettes. Consequently, every one of the 2.2 lakh ATMs in India had to be “re-calibrated”.

Re-calibration was a massive and complex exercise that required coordination across banks, ATM manufacturers, the National Payments Corporation of India, and switch operators. Engineers had to personally visit each ATM and spend between two to four hours with an ATM to complete the re-calibration.

Limited funds during demonetisation: Most of the banks packed all four ATM cassettes with available notes of ₹100. This limited the ATM’s access to citizens. (One ATM could, at the maximum, meet the needs of only 105 people per day as ATM could store currency worth ₹2.1 lakh in ₹100 notes).

When the stock of ₹100 notes was quickly exhausted, banks demanded more from the RBI. The RBI had no option but to supply old and soiled notes that banks had returned to the RBI earlier. Soiled notes often jammed the ATMs and further complicated the issue.

The quality of Rs 2000 notes: According to Ramakumar, many notes were poorly printed; some notes had a shadow of Mahatma Gandhi’s face in addition to the photograph of his face; some others had uneven borders; while others were of varying colour shades and sizes.

The issue of change: There locals in villages do not offer change or a balance payment over transactions in Rs 2000 even today. In effect, the problem of a short supply of notes was exacerbated by the release of the ₹2,000 note.

Can a growing economy have the ₹500 note as the highest denomination?

The highest denomination note in an economy serves as a store of value and is scarcely used in day-to-day transactions. As per capita incomes and inflation rise, the highest denomination note sheds value and becomes a note for day-to-day transactions. The economy would need a new higher denomination note to act as a store of value. This is the reason the RBI had requested the government to let it issue ₹5,000 and ₹10,000 notes in 2014.

The cash-to-GDP ratio in India was 12% in 2015-16 but it rose to 14.5% in 2020-21 and 13.3% in 2021-22. This highlights the value of notes is eroding with inflation, and real interest rates are falling. So, the demand for higher denominations will increase.

Would an e-rupee be a perfect substitute for a larger denomination note?

For that, the digital currency must meet the properties such as anonymity, general purpose use, exchangeability and etc. The RBI has stated that anonymity can be assured only “to a certain degree.” The other properties are still evolving. So, it is hard for a digital currency will emerge as a new store of value in shorter time.