Unveiling the Vanishing Pink: A Deep Dive Into the Withdrawal of India’s Rs. 2000 Notes and its Ripple Effects

By Sabarno Bhattacharya

On the 22nd of May, 2023, the Reserve Bank of India (RBI) announced that it would withdraw Rs. 2000 notes from circulation in pursuance of its Clean Note Policy. Although withdrawn from circulation, the RBI has stressed on the fact that the Rs. 2000 note continues to be a legal tender till 30th September, 2023. This article will emphasize on the history, reason and possible effects of the withdrawal of the pink note.

What is a Legal Tender?

The RBI has said that the Rs. 2000 note will remain a legal tender till 30th September, 2023. So, what exactly is a legal tender?

By definition, Legal tender is the national currency, such as paper money and coins, that is declared by law to be valid payment for debts and financial obligations. The paper notes and coins that we use have intrinsic value. The reason people accept notes and coins as a means of transaction is because they are obliged to do so by law.

The fact that the RBI has stated that the Rs. 2000 notes will continue to be legal tender till 30th September means that one can use the pink notes to make transactions till 30th September. Any transaction done thereafter cannot be completed using the Rs. 2000 notes.

Why is the RBI phasing out the Rs. 2000 note?

The main intention of introducing the Rs. 2000 note in 2016 was to replenish the circulation of currency quickly post demonetization.

The RBI has repeatedly stated that it wants to reduce the amount of high denomination currency in the economy and has stopped printing Rs 2000 notes over the past 4 years.

As per the RBI’s data, 89% of Rs 2000 notes were issued prior to March 2017 and are at the end of their lifespan of 4–5 years. The value of these banknotes in circulation has declined sharply from Rs. 6.73 lakh crore at its peak in March 2018 which accounted for 37.8% of all banknotes in circulation at that time to just Rs. 3.62 lakh crore which constitutes for 10.8% of all notes in circulation as of March 2023.

Reason for the decline in the number of Rs 2000 note

The denominational hierarchy of currencies all over the world is premised on the logic to ensure maximum liquidity. Prior to demonetisation, the highest denomination of currency was the Rs. 1000 note followed by Rs. 500. At the time of demonetisation, these two values of currency accounted for almost 86.4%. Note that before demonetisation, the difference between the highest denomination (Rs 1000) and the next (Rs 500) was exactly double. The removal of the Rs 1000 note and subsequent introduction of the Rs 2000 has quadrupled this difference. This implied that although the Rs 2000 note is a store of value, its liquidity has decreased. This is the reason why people have stayed away from using them. Since the difference between the top two currencies have increased four times, the pressure mounted on Rs 500 notes since a large number of them were used to merely support the illiquid Rs 2000 notes. In simpler terms, instead of being readily available for transactions, a large number of Rs 500 notes were merely present to facilitate the circulation of the Rs 2000 note. This is the main reason why nobody wanted to hold the new pink notes.

Effect of this Policy

• Given that at present the value of Rs. 2000 notes is Rs. 3.62 lakh crore or 10.8% of the currency in circulation, it is unlikely that this policy will have any big disruption. The high circulation of smaller denominations of notes and the ever-rising use of Unified Payment Interface (UPI) will help to fill the void.
• This Policy which urges people to deposit or exchange their notes might lead to an increase in bank deposits. Also, since all the Rs. 2000 notes in circulation will come back to banks as deposits this will lead to a decrease in money supply which in turn may help in increasing the liquidity in the banking system. This point is especially important as it comes at a time when deposit growth is lagging bank credit growth.
• The SBI’s research report ‘Ecowrap’ expects that almost the entire amount of Rs. 3.62 lakh crore in the form of Rs 2000 notes will come back into the banking system. This is expected to have a favourable impact on interest rates.

Conclusion

This decision by the RBI cannot be compared to demonetisation. The aim seems to be aimed at completely pulling out Rs 2000 notes from the monetary system. This policy should not have any adverse effect on the common citizens. Most people have started to use UPI as a means of transaction and those who have Rs. 2000 notes with them have been given a window till 30th September to exchange or deposit their banknotes. Therefore, they are insulated from the move.

Hoarders of cash seem to be the primary target of the government and the RBI, who possibly have been given the last chance to convert black money into white.