One would have definitely felt that the RBI's announcement on 19^th May, 2023, bore resemblance to the one made by the Hon’ble PM on 8^th November, 2016. While a similar sense of concern was there, the impact this time appeared to be less disruptive

On 19^th May, 2023, the RBI issued a notification with a shocking yet comforting subject line: "Withdrawal of ₹2000 Denomination Banknotes from Circulation; Continues as Legal Tender." The RBI has decided to withdraw INR 2,000 notes from circulation as part of its 'Clean Note Policy' and has directed banks to immediately stop issuing these notes. The public has been granted a 4-month period until 30^th September, 2023, to exchange or deposit their INR 2,000 notes at bank branches or designated RBI offices. Let’s break this down for a deeper understanding.

A. 2016 vs. 2023 – What’s the difference?

• During 2016’s move, the introduction of the high denomination note of INR 2,000 was deemed necessary due to the significant withdrawal of currency, which affected 86% of the total currency in circulation at that time. However, the recent withdrawal of INR 2,000 notes has played a beneficial role in injecting more currency (in form of smaller denominations) into the system to provide support for the economy. Further, INR 2,000 notes constituted only 10.8% of the total notes in circulation as on 31^st March 2023. Hence, ideally public should have smaller quantities of these notes.
• INR 2,000 note will continue to remain a legal tender (i.e., can be continued to be used in transactions) vis a vis the overnight decision of invalidating INR 500 & 1,000 notes. Enough time has been given now to deposit or exchange these notes. The public can exchange INR 2,000 notes worth INR 20,000 at a time from 23^rd May, 2023 to 30^th September, 2023 and deposit any amount in their bank accounts during the process.

B. Reasoning by RBI

• The pink notes were introduced in 2016 for replenishing the void caused in currency circulation due to demonetization.
• The printing of INR 2,000 banknotes was discontinued in 2018-19 as the objective of introducing the denomination had been fulfilled along with sufficient availability of banknotes in other denominations. Accordingly, the majority of pink notes which were issued prior to March 2017, have completed their estimated lifespan and are not observed to be commonly used for transactions anymore.
  ‍(Hence, since the injection was paused already, the notes would have gone out of circulation automatically in few years.)
• The 2016 move was aimed at curbing black money and currency hoarding, no such intent has been attached to the current withdrawal so far. It has been stated that the withdrawal is pursuant to ‘Clean Note Policy’. This policy initiative aims to ensure the circulation of clean and high-quality bank notes by way of withdrawing the unfit or damaged notes from circulation and replacing them with new ones.
  (Though it is well known to all that the high denomination notes has encouraged hoarding by black market operators due to its ease of storage and exchange. As a result, these notes gradually disappeared from circulation, causing banks to raise concerns about the scarcity of INR 2,000 notes.)

C. Likely effect on economic growth

Speculations suggest that the withdrawal of currency could result in a significant influx of deposits into banks. Consequently, this increased liquidity could potentially lead to a decrease in interest rates offered on loans. With banks having more funds available, they would be able to extend increased lending. Lower interest rates would also drive up the demand for loans. Overall, this scenario is expected to benefit the entire ecosystem, fostering credit growth and economic development.

D. Boost to consumption in disguise

Since the announcement, these bank notes have been seen to be offloaded in form of purchase of fuel, gold and silver jewellery (even through prices are sky rocketing), cash on delivery purchases, high value premium products. Needless to say, this all is to avoid the hassle of forming queues up at banks to exchange them or to invite income tax examinations on large sum deposits. While public is using these sidesteps, the businesses have found a golden opportunity to boost sales. However, law-abiding individuals who possess legitimate INR 2,000 notes stays calm and reassured, as they have valid income sources associated to their pink-coloured currencies.

E. What the public says?

The survey conducted by Local Circles revealed some interesting facts:

• 64% of citizens do not have INR 2,000 notes.
• 6% of those surveyed have INR 1,00,000 or more in INR 2,000 notes.
• 34% of citizens with INR 2,000 notes tried to use them after the RBI’s announcement.
• 91% of citizens said most retail merchants/stores, chemists, hospitals, service providers, petrol pumps are unwilling to accept INR 2,000 notes.
• 68% of citizens surveyed want INR 2,000 notes only to be deposited in bank accounts and not exchanged.
• 64% of citizens surveyed supported the government’s move, 22% are opposed to withdrawal, 12% indicated it makes no difference to them; and 2% of respondents are not sure.

F. What will happen to the discontinued notes?

After collection, the notes are verified using the CVPS system (Currency Verification and Processing System), which can handle 50,000 to 60,000 notes per hour. The device counts the notes and determines their authenticity and separates them into fit and unfit categories. Inappropriate notes are shredded, while fit notes are cut for recycling. Previously, unfit notes were burned, but due to air pollution concerns, they are now processed into briquettes and used in industrial furnaces and the production of paper boards. RBI invites tenders to sell these briquettes. In 2016, the shredded notes were sold to Western India Plywoods Limited.

G. Prying eyes of the Income Tax Department

While the RBI has neither made the presentation of a valid ID or filling of deposit forms mandatory, nor the requirement of being an account holder in the same bank for making exchange, however, all banks need to follow the RBI guidelines for the deposit and exchange process.

According to Rule 114B of the Income-tax Rules, any person who is depositing cash of more than INR 50,000 in a bank account in a single day has to quote his PAN. Further, as per Rule 114BB, any person who is depositing cash of more than INR 20,00,000 in a bank account in a financial year, has to quote his PAN / Aadhaar number.

As per Rule 114E, details of high-value cash deposits are furnished by banks to the Income Tax department in the Statement of Financial Transaction. Cash deposits of more than INR 50 lakhs in the current account in a financial year, as well as cash deposits of more than INR 10 lakhs in account (other than current account and time deposit) will be reported under SFT. This is thereby reflected in the depositor’s Form 26AS and Annual Information Statement (AIS).

The Income Tax department reconcile this data reported with the income tax returns filed. If the details do not match, the assessee can receive income tax notice wherein the onus would be on the taxpayer to establish the source of income along with providing supporting evidence.

H. Afterword

According to the RBI, the removal of the INR 2,000 note is part of a comprehensive currency management exercise and should not be considered as demonetization. Fortunately, this move is unlikely to cause inconvenience to the general public, as they have already adopted digital payment systems such as UPI, G-Pay, and Paytm. Consequently, they are not significantly affected by this change. The government and RBI's focus appears to be on targeting cash hoarders (especially when elections are round the corner!) rather than impacting ordinary citizens.