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Why did India withdraw the circulation of Rs 2000 notes and what impact can it cause?

The Reserve Bank of India announced the withdrawal of Rs 2000 denomination from circulation on Friday, May 19. The banknotes of this amount are to be deposited or exchanged in the bank by their owner between May 23 to Sept. 30 with submission of maximum 10 notes at a time.  Till then, the notes shall continue to trade legally but its status after has remained unclear. The time frame is given to likely avoid the chaos and long ques outside the banks and ATMs as that in 2016.

The denomination was introduced replacing Rs 500 and Rs 1000 notes after the demonetization act in Nov. 2016. The circulation began under Section 24(1) of the RBI Act 1934. Being the highest currency value of Rs. 2000, the ban can wave an impact among several business sectors.

The RBI, however, stated that with the existence of other currency notes and various e-transactions available, the demand of the notes kept reducing and 89% of the notes are no longer circulating. Moreover, taking advantage of the heavy amount, there has been a risk of high counterfeit which lacked advance security. Therefore, printing of Rs 2000 notes stopped four to five years back, prior to March, 2017. The current amount circulating is Rs 3.62 lakh crores ($44 billion) which is 10% of India’s total economy.

The withdrawal of the amount took place under the “clean note policy” by the RBI. The policy seeks to provide currency notes with better quality and security features as a replacement. Previously, the RBI has replaced notes issued before 2005 with the ones with more efficient security features. The notes remain legal in the market and are not circulated anymore from the bank.

While larger industries have experiences in e-commerce, the smaller businesses and agricultural sectors might face inconvenience, Yuvika Singhal, an economist at QuantEco Research told the Economic Times. A Bloomberg report of May 22 suggested that it might spur the consumption of gold and real estate property.

Rupa Rege Nitsure, group chief economist for L&T Finance holdings said it’s a wise move to make before the state and general elections when the cash usage tends to spike. The central bank or the government is yet to make any comments on this decision.

Taking a dig at Modi, Congress Chief Mallikarjun Kharge connected the decision to the PM’s visit to Japan. Following Modi’s visit to Hiroshima on May 19 to attend the G7 summit, he said there is a “note bandi” whenever he visits the place. The demonetization in 2016 also took place after he visited the country.

Photo courtesy: The Economic Times

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