On the evening of May 19, 2023, the Reserve Bank of India (RBI) issued a press release regarding the withdrawal of Rs.2000 denomination banknotes from circulation. The press note contains certain statements that have caused confusion regarding the rationale behind this decision. Following are the points mentioned by the RBI in the press note.

The ₹2000 denomination banknote was introduced in November 2016 primarily to meet the currency requirement of the economy in an expeditious manner after the withdrawal of legal tender status of all ₹500 and ₹1000 banknotes in circulation at that time.

The objective of introducing ₹2000 banknotes was met once banknotes in other denominations became available in adequate quantities. Therefore, printing of ₹2000 banknotes was stopped in 2018-19.

About 89% of the ₹2000 denomination banknotes were issued prior to March 2017 and are at the end of their estimated life-span of 4-5 years.

The total value of these banknotes in circulation has declined from ₹6.73 lakh crore at its peak as on March 31, 2018 (37.3% of Notes in Circulation) to ₹3.62 lakh crore constituting only 10.8% of Notes in Circulation on March 31, 2023. It has also been observed that this denomination is not commonly used for transactions.

Further, the stock of banknotes in other denominations continues to be adequate to meet the currency requirement of the public.

In view of the above, and in pursuance of the “Clean Note Policy” of the Reserve Bank of India, it has been decided to withdraw the ₹2000 denomination banknotes from circulation.

The banknotes in ₹2000 denomination will continue to be legal tender.

Therefore, it implies that the following are the driving factors behind this exercise :-

1. The introduction of Rs.2000 banknotes was intended as a temporary measure to address the void created by the demonetization of Rs.500 and Rs.2000 notes. Consequently, there is no longer a need for Rs.2000 notes.

2. The circulation of Rs.2000 notes has been reduced, prompting the RBI to decide on their withdrawal from circulation.

3. The withdrawal of Rs.2000 notes is a routine practice undertaken by the RBI as part of its clean note policy. Similar Exercise carried in year 2014 regarding the withdraw of the banknotes dated before year 2005. This policy aims to ensure the availability of high-quality banknotes to the public and maintain the integrity of the Indian currency by removing damaged, counterfeit, or soiled notes from circulation.

However, these three reasons are contradictory as they have distinct causes and consequences. This has led to numerous unanswered questions that persist even days after the press note was issued by the RBI. Let Discuss one by one.

Questions Number 1 -

The RBI has stated that the majority of Rs.2000 banknotes were issued before the year 2017, and these banknotes have an estimated lifespan of 4-5 years. Hence, in accordance with the clean note policy, the RBI intends to withdraw them.

In light of this, it raises the question regarding the lifespan of the newer banknotes such as Rs.500 and Rs.100 that were also introduced in 2017. What are the lifespan of those notes? Are there plans by the RBI to replace these banknotes as well under the clean note policy?

Question Number 2 -

Secondly, the RBI draws a comparison between the current exercise and a similar undertaking in the year 2014. However, the reality contradicts this assertion. In 2014, the RBI conducted operations to exchange older notes for new ones. If the current exercise were truly comparable to that of 2014, the RBI would have directed banks to provide new Rs.2000 notes in exchange for the older ones. Yet, this is not the case.

Therefore, it raises the questions of why and how the RBI is making this comparison and what forms the basis for such a comparison?

Question number 3 -

According to the RBI, the introduction of the ₹2000 denomination banknote in November 2016 was primarily aimed at fulfilling the currency requirements following the withdrawal of legal tender status for all ₹500 and ₹1000 banknotes in circulation at that time.

Given this information, it becomes unclear why there is a need to discuss the clean note policy in the current context, as stated by the RBI in the press note dated May 19, 2023. The RBI's stated objective for the Clean Note Policy is to provide citizens with high-quality currency notes and coins while removing worn-out notes from circulation.

Therefore, the two lines of reasoning provided by the RBI - the introduction of ₹2000 banknotes as a temporary measure to address the void created by the demonetization of ₹500 and ₹2000 notes, and the Clean Note Policy - appear to be contradictory.

RBI should clarify what are the true intentions behind the ongoing exercise?

Question Number 4 -

The RBI has also cited the reason that the Rs.2000 denomination is not commonly used for transactions.

If this is indeed the case, then it raises the question as to why the RBI has not announced the withdrawal of Rs.2 and Rs.5 notes, which are also not commonly used for transactions.

Question Number 5 -

According to the RBI, approximately Rs.6.73 lakh crore worth of Rs.2000 notes were in circulation, indicating a total of 337 crore Rs.2000 notes printed. The printing cost of each Rs.2000 note is Rs.4.18, resulting in an expenditure of at least Rs.1400 crore for printing the now-withdrawing Rs.2000 notes.

In addition, the RBI is likely to print new notes of Rs.500, Rs.200, and Rs.100 to replenish the currency in circulation following the withdrawal of Rs.2000 notes. To exchange one Rs.2000 note, banks will need four Rs.500 notes and twenty Rs.100 notes. The printing cost of one Rs.500 note is Rs 2.57, and for the Rs.100 denomination note, it is Rs 1.51.

Considering that Rs.3.62 lakhs crore worth of Rs.2000 notes are currently in circulation (equivalent to 181 crore notes), the RBI would require 724 crore notes of Rs.500 denomination to exchange these 181 crore Rs.2000 notes. With the printing cost of one Rs.500 note being Rs.2.57, the total cost of printing 181 crore Rs.500 notes would amount to Rs.1860 crore.

Hence, the pertinent question arises that who is responsible for the expenditure of Rs.3260 crores (Rs.1400 crores in printing and Rs.1860 crores in withdrawal) incurred during the process of introducing and withdrawing the Rs.2000 notes This calculation does not take into account the significant costs borne by citizens, the unnecessary burden placed on banking infrastructure, and other associated expenses.

Question Number 6 -

The FAQ uploaded by the RBI regarding the withdrawal of Rs.2000 banknotes addresses the question of what will happen if a bank refuses to exchange or accept deposits of ₹2000 banknotes. However, it fails to mention a similar grievance redressal mechanism for cases where sellers or service providers refuse to accept Rs.2000 notes as payment for goods and services.

This aspect is crucial in the ongoing exercise, as numerous citizens have reported instances where vendors are unwilling to accept Rs.2000 notes. The RBI Governor is also aware of this issue.

Why RBI does not introduced comprehensive grievance redress mechanism ?

Question Number 7 -

According to the RBI's press note dated May 19th, citizens are allowed to exchange Rs.2000 banknotes for banknotes of other denominations, up to a limit of Rs.20,000 at any bank. It is not necessary for citizens to provide identification proof or fill out forms for this exchange.

The potential consequence of this policy is that an individual holding black money could potentially visit a bank with Rs.20 lakhs worth of Rs.2000 notes and collude with bank employees to facilitate the exchange. The bank employee could split this transaction into 100 separate transactions to conceal the nature of the exchange.

What stopping the RBI to introduced the transparent and accountable mechanism for the Exchange of the Rs.2000 notes?