It’s been five days since RBI announced its decision to phase out Rs 2000 currency note from active circulation by 30th September 2023.
After the initial panic and furore settled over the validity of the denomination and exchange process, there are interesting trends to witness. In this article we discuss the immediate fallout of the decision, challenges and impact on the economy.
According to experts, the move is aimed to prevent the increase in cash transactions that goes up typically before general elections.
While the move brought back the dark memories of 2016 demonetisation nightmare where 86% of the currency in circulation was withdrawn overnight, Rs 2000 currency note constitutes less than 10% of total currency in circulation.
Since then, digitization and convenient payment apps have been adopted by small, micro businesses and large enterprises alike. Economists do not foresee any drastic disruptions after this move. However some sectors like farming, real estate etc involving higher cash usage will be impacted.
While the larger economy recovered from the pandemic aftermath, the rural sector lagged behind with slow recovery, high food prices and erratic weather patterns. In FY 23, rural inflation remained above urban inflation by 45 bps
Agriculture input inflation has remained in double digits due to increase in cost of fuel, metals, fodder and animal feed.
While real estate has shown signs of recovery in the last two years with a pick up in demand and prices, it was the worst hit after demonetisation with cash drying up. Cash remains a main lever in India’s real estate economy. Agriculture, real estate, and other cash intensive businesses remain vulnerable to any decrease in cash circulation in the long term.
With an influx of currency coming back in the banking system, bank deposits will increase. This will increase banks’ liquidity and ease pressure to grow deposits to match credit demand, thus, may ease short term interest rates.
Amidst some confusion in public regarding the process to exchange/deposit notes at banks, there are many shops and outlets not accepting the 2k notes for any purchases. RBI has clarified that the 2000 denomination is a valid legal tender, yet the reluctance remains.
Cash is King!
While the situation will unfold in the coming months, there are interesting trends emerging. There are many who would rather spend, than deposit or exchange their pot of 2k currency notes. According to reports, jewellers are happy to see buyers rush with 2k notes amidst a lull due to high gold prices for the last few months. Some jewellers in the unorganised market are allegedly charging a premium for accepting payment in 2k notes!
In a reversal of trends, petrol pumps are witnessing only 10% digital payments as against half of their sales, with most buyers rendering 2k notes in cash. Online food and grocery marts have a spurt in cash on delivery orders. Travel, consumer durables, and high value goods are enjoying a sales spike in cash transactions.
While the larger impact of the decision on the economy will unfold, any demonetisation move hits the small businesses the worst, as 2016 demonstrated. A higher denomination currency, in addition to small ones, provides the necessary wheel for cash-dependent businesses, and many of these are small and medium enterprises. With the 2000 denomination disappearing, whether Rs 1000 will debut again to fill the gap for larger cash transactions, is yet to be seen.
- What is the reason for withdrawal of Rs 2000 banknotes?
According to RBI the Rs 2000 note came into existence to meet the cash requirement after demonetisation of Rs 500 and Rs 1000 denomination currency in Nov 2016. The purpose of introducing the currency has been served. RBI stopped printing this denomination in FY 2019 and withdrawal is in line with its ‘clean note policy.’
- Will the 2000 currency note remain valid?
RBI has clarified that Rs 2000 banknote is a legal tender and will remain so but RBI has asked the public to exchange/deposit it with banks before 30th September. The fate of this currency after 30th Sept remains to be seen, as per RBI directive after this period.
- Do I need to have an account with the bank to exchange Rs 2000 currency notes?
No, you can exchange the notes even if you do not have an account with a bank, within a one time limit of Rs 20,000 or 10 notes.
- Can the Rs 2000 currency notes be deposited or exchanged without any limitation?
You can deposit these notes in your bank account without any limitation. For exchange, at one time 10 notes i.e. Rs 20,000 value can be exchanged at one time. Banks will do their due diligence for deposit or exchange.