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Why has the RBI withdrawn Rs 2,000 notes?

GS Paper 3

 Syllabus: Indian Economy and issues relating to Planning, Mobilization of Resources, Growth, Development and Employment

 

Source: IE

Context: The RBI has decided to withdraw the Rs 2000 denomination banknotes from circulation.

 

When were the Rs 2000 banknotes introduced?

  • On November 8 2016, the PM of India announced demonetisation, withdrawing two banknotes (Rs 500 and Rs 1000) from circulation with immediate effect.
  • The Rs 2000 and the new Rs 500 note were introduced under (Section 26) of the RBI Act 1934, primarily with the objective of meeting the currency requirement of the economy expeditiously.

 

Demonetisation
MeaningIt is the process of eliminating the lawful acceptance status of a monetary unit → The existing types of currency are withdrawn through circulation and supplanted with new currency.
NeedWhile demonetization is exceptional, governments around the globe have used it to check – hyperinflation situations, counterfeit currency, terror and tax fraud, and to introduce a new monetary system in some circumstances.
AdvantagesControl criminal activities forbid tax avoidance and other financial crimes, contribute to a paperless financial system
DisadvantagesExpenses issuing new currency and coinage minting can be high, illegal activity will not be stopped entirely and may create chaos among individuals
Primary reasons for demonetisation in India in 2016To check fake currency notes and to break the grip of corruption and black money.
Effect on India
The SC’s (4:1) verdict on demonetisation

 

Why has the RBI withdrawn Rs 2000 notes?

  • With the fulfilment of the objective, the printing of Rs 2000 notes was stopped in 2018-19.
  • The RBI issued the majority of the Rs 2000 denomination notes prior to March 2017 – now at the end of their estimated lifespan of 4-5 years.
  • Therefore, in pursuance of the Clean Note Policy of the RBI, it has been decided to withdraw the Rs 2000 denomination banknotes from circulation.

 

What is the Clean Note Policy?

  • The policy was introduced in 1999 by the then RBI Governor: Bimal Jalan.
  • It seeks to give the public good-quality currency notes and coins with better security features, while soiled notes are withdrawn out of circulation.
  • Under the policy, the RBI had earlier decided to withdraw from circulation all banknotes issued prior to 2005 as they have fewer security features.

 

Will the Rs 2000 banknotes continue to be legal tender?

  • The public can continue to use Rs 2000 banknotes for their transactions and also receive them in payment.
  • However, they are encouraged to deposit/exchange these banknotes on or before September 30, 2023. The RBI has not clarified the status of these notes after September 30.

 

Could there be a repeat of the demonetisation chaos of 2016?

  • It is unlikely, as the printing of Rs 2000 notes was stopped in 2018-19, and they are no longer commonly seen with the public (constitute only 10.8% of notes in circulation).
  • Also, the decision to withdraw Rs 500 and Rs 1000 notes was announced suddenly, taking the public by surprise.

 

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