Announcing the move on Friday, the Reserve Bank of India said the 2,000 rupee ($24) notes had reached the end of their estimated life. While these banknotes account for only about a tenth of the total currency in circulation, the RBI the decision sparked confusion and memes on social media as local newspapers reported a rush on jewelers to exchange the notes for gold.
However, the scale of the recent action is a far cry from 2016, when 86% of India’s currency was invalidated overnight, leading panicked citizens to queue at banks and ATMs across the country. . There have been reports of dozens of people collapsing or even dying while waiting in line for hours at a time.
Why remove the 2,000 rupee notes?
The central bank introduced the 2,000 rupee note to supplement the banknotes in circulation after Prime Minister Narendra Modi’s 2016 move removed the 500 and 1,000 rupee notes as legal tender.
RBI removes Rs 2000 notes from circulation, which will continue to remain legal tender
The printing of banknotes, the largest denomination currency in use, was halted in 2018-2019 as larger volumes of other denominations became available and the shift to digital transactions occurred. The note was often hoarded and there were reports of high quality, counterfeits in circulation.
Is the move related to the elections?
2016 demonetization the announcement came weeks before an important state election and was seen by Modi’s critics and opposition parties as a crackdown on spending by political rivals. This time, there are at least five big state polls towards the end of the year and India will go to a nationwide vote next summer.
The central bank has said in the past that money in circulation usually increases around an election. The 2,000 rupee note is often the preferred choice for black or unaccounted money deals and bribery due to the higher denomination.
What happens to consumers?
Unlike 2016, when the announcement led to chaos, analysts believe the impact will be muted this time around. “We don’t see panic, but a lot will depend on how prepared banks are to deal with the crowds,” said Yuvika Singhal, an economist at QuantEco Research.
The central bank has advised people to deposit or exchange these notes by 30 September, unlike seven years ago when the 500 and 1,000 rupee notes ceased to have value overnight. Also, there is no daily limit on the amount that can be traded.
What about businesses?
Consumers are likely to use their 2,000 rupee notes to grab high-value household items, precious metals and even property, boosting these sectors and boosting consumption in Asia’s third largest economy for a while.
People’s reluctance to disclose their probable unaccounted for money can lead to an “initial steep increase in spending,” said Samiran Chakraborty, an economist at Standard Chartered Bank.
On the other hand, cash-oriented sectors, including small retailers and manufacturers, may be reluctant to accept these notes due to the hassle of having to exchange them later, said Radhika Rao of DBS Bank. But that disruption is unlikely to be “prolonged” as the banknotes are still legal tender, he added.
What is the impact on banks?
The increased liquidity will ease some pressure on Indian lenders to raise deposit rates to meet growing credit demand. Banks have reported double-digit credit growth in recent months, as firms have stepped up activity to meet growing domestic demand, despite the RBI raising key rates by 250 basis points since May last year.
Economists from QuantEco Research and Kotak Mahindra Bank Ltd estimate that up to 1 trillion rupees ($12.1 billion) could be added to India’s financial system, spearheading a rally in the rupee and government bonds.