Rs 2,000 note withdrawal: Clean note is stated agenda, but there's a hidden one

The Reserve Bank of India (RBI), on May 19, 2023, notified that in line with its ‘Clean Note Policy’, the ₹2,000 denomination banknotes shall be withdrawn from circulation. However, the note will continue to be legal tender.

Though this major exercise falls under the Clean Note Policy, it seems there is a hidden agenda behind it, aimed at helping bank borrowers. To explain this further, while any withdrawal of currency notes may have other purposes like eradication of black money and counterfeit notes, in the present case, it does not seem to be so.

The notification further said ₹2,000 banknotes can be deposited into accounts maintained with all banks in the usual manner. The exchange of the notes is also allowed at banks up to a limit of ₹20,000 at a time.

A nearly 7-year history 

The ₹2,000 denomination banknote was introduced in November 2016 primarily to meet the immediate currency requirement of the economy, after withdrawal of the legal tender status of all ₹500 and ₹1,000 banknotes in circulation at that time.

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The printing of ₹2,000 banknotes was stopped in 2018-19. According to RBI, the majority of ₹2,000 notes issued prior to March 2017 have completed their estimated lifespan and are not observed to be commonly used for transactions anymore.

Clean Note Policy

The Clean Note Policy has been in operation since 1999. The purpose of this policy is to provide good quality clean and usable currency notes to the public and refrain from recycling soiled notes. The public has been urged not to write on the currency notes to maintain their cleanliness. Banks are advised to dispense with stapling of note packets and to introduce banding the packets with paper/polythene bands so that the notes last longer.

So, the Clean Note Policy is an on-going exercise and in the process all the soiled and mutilated ₹2,000 notes should have been removed from circulation by the banks and RBI.

Why should all the notes be withdrawn from circulation now? When it has been decided to keep the “legal tender” status of the ₹2,000 note, why should good quality notes now be withdrawn? When it continues to be a legal tender, why has the RBI advised people to deposit the ₹2,000 notes with banks before September 30, 2023?

Though this exercise is being conducted under the Clean Note Policy, it is not convincing.

Black money eradication

Demonetisation or withdrawal of a currency can be usually part of a black money eradication exercise. But in such an exercise, severe restrictions will be observed and complete details of tenderers will be collected. However, in the present exercise, no such restrictions have been placed. Hence, this exercise does not seem like an anti-black money exercise.

Exercise to detect counterfeit currency

When a larger number of counterfeit currency is detected, central banks typically withdraw the series/currency. The total value of ₹2,000 banknotes was ₹3.62 lakh-crore as on March 31, 2023, constituting just 10.8 per cent of notes in circulation. As the table below shows, the number of counterfeit ₹2,000 notes is very small in comparison to ₹100 or ₹200 notes.

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So, why were ₹2,000 notes singled out for withdrawal?

To help borrowers

Bank borrowers, mainly corporate borrowers, have a powerful lobby and they usually demand lower interest rates for their borrowings. The lending rates of banks are guided by the repo rate and hence these borrowers suggest to RBI to reduce the repo rate.

As the RBI has projected inflation for 2023-24 at 5.2 per cent, the RBI is in no mood to reduce the repo rate.

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The present exercise of withdrawal of ₹2,000 notes may increase the deposit base from ₹1 lakh-crore to ₹1.8 lakh-crore over the June-September period as per some estimation. This will help the banks to have surplus funds which may enable them to reduce lending rates.

This seems to be the reason for the entire exercise of the withdrawal of the ₹2,000 notes. Though it is been presented under the Clean Note Policy, it seems the hidden agenda is actually to help bank borrowers.

(The writer is a retired banker. The views expressed are his own.)