Reason for Withdrawal of Rs.2000 Circulation by RBI

Here are the reasons for introducing notes for 2000 rupees by RBI:

1. Section 24(1) of the RBI Act 1934 allowed for the introduction of the Rs 2000 note in November 2016

1. Introduced with the primary goal of quickly satisfying the economy's currency needs following the removal of the Rs. 500 and Rs. 1000 notes' legal tender status

1. The printing of Rs 2000 notes was discontinued in 2018–19 when that goal was achieved and notes of other denominations were sufficiently available

1. Additionally, there is a sufficient supply of banknotes in other denominations to satisfy currency needs, hence this denomination is no longer frequently utilized for transactions.

What Can be Done with the 2,000 Rupee Notes

The Reserve Bank of India (RBI) has issued instructions to banks for the immediate discontinuation of Rs. 2,000 denomination banknotes. As a citizen, you should follow these steps for the exchange or deposit of your Rs. 2,000 notes:

1.  Deposit in Bank Account or Exchange: You have the option to deposit your Rs. 2,000 banknotes into your bank account or exchange them for banknotes of different denominations at any bank branch.

1.  Deposit Process: Depositing into your bank account can be done through the usual procedures without any restrictions, subject to applicable provisions.

1. Exchange Limit: The exchange of Rs. 2,000 banknotes for banknotes of other denominations can be conducted up to a maximum limit of Rs. 20,000 at a time at any bank. This provision becomes effective from 23 May 2023.

1. Deadline: All banks are mandated to offer deposit and/or exchange facilities for Rs. 2,000 banknotes until 7 October 2023.

Note: Citizens had the opportunity to deposit and/or exchange their Rs. 2,000 banknotes until 7 October 2023.

Reasons for Withdrawal of Rs. 2,000 Notes

1.  Introduction During Demonetisation: In November 2016, the Rs. 2,000 note was introduced as part of the demonetisation initiative, replacing the discontinued Rs. 500 and Rs. 1,000 notes. The primary goal of demonetisation was to address issues like the circulation of unaccounted money, corruption, tax evasion, and the promotion of digital transactions.

1. Achieving Sufficient Money Circulation: Once the objective of ensuring an adequate money supply in the economy was accomplished, the production of Rs. 2,000 notes ceased in the financial year 2018-19.

1. Reduced Transactions and Increased Digitisation: The recent upsurge in digital transactions and reduced reliance on high-denomination currency notes played a significant role in the decision to withdraw Rs. 2,000 notes.

1. Lifespan of Notes: The majority of Rs. 2,000 notes currently in circulation were issued before March 2017 and have reached their expected lifespan of 4 years to 5 years. The Reserve Bank of India (RBI) adheres to the Clean Note Policy, which aims to maintain the quality of currency notes in circulation.

Impact and Rationale

1. Limited Economic Impact: The discontinuation of Rs. 2,000 notes is expected to have a minimal impact, given that they account for only 10.8% of the total currency in circulation.

1. Adequate Availability of Alternative Denominations: There is a sufficient supply of banknotes in various other denominations, ensuring the smooth functioning of daily life and the economy without any disruptions.

1. Stimulating Bank Deposits: This withdrawal could potentially lead to an increase in bank deposits, which in turn may have a positive impact on credit expansion and could help moderate short-term interest rates.

1. Cracking Down on Black Money and Corruption: The decision to withdraw these notes aligns with the broader strategy to combat the circulation of unaccounted wealth and corruption by promoting transparency and formalising economic activities.

What are the Implications of the Withdrawal?

Here are some of the implications of the withdrawal as follows:

1. Short-term Slowdown in Economic Growth: Withdrawals may cause an end in cash-based transactions

1. Long-term Advantages: Although the economy may see a short-term decline, it will eventually become more transparent and efficient

1. Banks: Reduce the strain on increases in deposit rates

1. There will be less money in circulation, which will increase the liquidity of the banking system

1. Shorter term Government Securities: As these funds are placed in shorter-term government securities, the market's short-term interest rates may decline due to increased banking system liquidity and bank deposit growth

1. Clean Notes: To give the public high-quality banknotes with improved security measures.

Clean Note Policy by RBI

1. The goal of the Clean Note Policy is to provide the public with high-quality coins and currency notes that have improved security measures. Soiled notes are removed from circulation
2. Since banknotes printed before 2005 have lesser security safeguards than those created after 2005, the RBI had previously planned to remove all of them from circulation
3. However, notes issued before 2005 remain legal tender
4. Only in accordance with the widely accepted worldwide rule that notes of different series should not be in circulation simultaneously have they been taken out of circulation.

Demonetisation in India

1. Definition and Legal Basis: Demonetisation is the process of revoking the legal tender status of a currency unit. In India, the authority for demonetisation is vested in Section 26(2) of the RBI Act, 1934, which empowers the government to declare banknotes as no longer having legal tender status.

1. Benefits: Demonetisation is undertaken to achieve several objectives, including stabilizing the currency, combating inflation, deterring counterfeiting, encouraging digital transactions, formalising economic activities, boosting tax revenues, and reducing instances of corruption and criminal activities.

1. Drawbacks: The process can lead to temporary economic slowdown, incur administrative expenses, and affect sectors that heavily rely on cash transactions.