The Hindu Editorial Analysis- 23rd May 2023 | Current Affairs & Hindu Analysis: Daily, Weekly & Monthly - UPSC PDF Download

Slow withdrawal

• The Reserve Bank of India has decided to withdraw Rs 2,000 denomination banknotes from circulation.
• Banknotes of ₹2,000 denomination were introduced after₹1000 and ₹500 banknotes were demonetised on November 8, 2016.

Demonetisation

• It is the process through which a nation's economic unit of exchange loses its legally enforceable validity.
• It is a drastic intervention into the economy that involves removing the legal tender status of a currency.

Why countries opt for demonetisation?

• To address issues like hyperinflation and to stabilize the currency
• To eliminate negative situations or actions like counterfeit currency, terror, and tax fraud
• To introduce a new monetary system in some circumstances
• To facilitate trade and access to markets,
• To push informal economic activity into more transparency

What are the advantages and disadvantages of Demonetization?

Demonetisation in India

• Previous demonetisation - Demonetisation has been implemented twice:
  • In 1946, RBI demonetized 1000- and 10000-rupee notes.
  • In 1978, the government demonetized 1000-, 5000-, and 10000-rupee notes in order to curb the menace of black money.
• 2016 demonetisation
  • On November 8, 2016, PM Modi announced the decision of the government to demonetise currency notes of Rs 500 and Rs 1,000 in a bid to tackle corruption.

News Summary: RBI to withdraw Rs 2,000 notes from circulation

• The Reserve Bank of India announced that it has decided to withdraw the Rs 2,000 currency notes from circulation.
• It asked all to exchange these notes by September 30, 2023.

Key highlights:

• The Rs 2,000 notes, however, will continue to be legal tender.
• Legal tender refers to the recognized currency or monetary instrument that is considered valid for transactions within a specific jurisdiction.
• Deposit into bank accounts can be made in the usual manner, without any restriction.
• The exchange facility for Rs 2,000 currency notes will start from May 23, 2023.

Why are Rs 2000 denomination banknotes being withdrawn?

• Rationale behind introduction of ₹2000 denomination banknote
  • The ₹2000 denomination banknote was introduced in November 2016 under Section 24(1) of RBI Act, 1934.
  • It was introduced primarily with the objective to meet the currency requirement of the economy in an expeditious manner after withdrawal of the legal tender status of all ₹500 and ₹1000 banknotes in circulation at that time.
• Objective fulfilled and printing of ₹2000 banknotes was stopped
  • With fulfilment of that objective, printing of ₹2000 banknotes was stopped in 2018-19.
  • A majority of the ₹2000 denomination notes were issued prior to March 2017 and are at the end of their estimated life-span of 4-5 years.
• ₹2000 banknotes lost its sheen
  • It has also been observed that this denomination is not commonly used for transactions.
  • The total value of these banknotes in circulation has declined from ₹6.73 lakh crore at its peak of March 31, 2018 (37.3 per cent of Notes in Circulation) to ₹3.62 lakh crore, constituting only 10.8 per cent of Notes in Circulation on March 31, 2023.
• Availability of banknotes in other denominations in adequate quantities
  • The stock of banknotes in other denominations continue to be adequate to meet the currency requirement of the public.
• Clean Note Policy of RBI
  • In view of the above factors, 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.
  • Clean Note Policy is a policy adopted by RBI to ensure availability of good quality banknotes to the members of public.

Analysis

• Segments most affected
  • The three segments which will be affected by this move will be gold & jewellery, real estate and political parties.
  • In the run up to elections, there is always a tendency to stack up cash.
• Deposit accretion of banks
  • Experts believe that, due to recent decision, deposit accretion of banks could improve marginally in the near term.
  • Deposit accretion refers to the increase in deposits held by a bank over a certain period of time.
  • It represents the growth or accumulation of funds in a bank's deposit accounts, which can come from various source.
  • This will ease the pressure on deposit rate hikes and could also moderate short-term interest rates.
• Crowd management at branches
  • At a time only 10 notes of ₹2,000 can be exchanged. Anyone can come back again as the restriction is at a time.
  • Hence, crowd management at branches may become difficult.
• Demonetisation with a human face
  • Many analysts feel this is demonetisation with a human face.
  • The latest RBI decision impacts just about 11% of currency in circulation and therefore will probably trigger little chaos.
  • People have time until September-end 2023, to deposit and/or exchange ₹2000 banknotes.

Has such withdrawal of notes happened before?

• In 2014, the RBI completely withdrew from circulation all banknotes issued prior to 2005.
• The January 22, 2014 notification urged public to approach banks for exchanging these notes after April 1.