A Brief History Of The Rs 2,000 Note

There is a reason why the announcement of the withdrawal of the Rs 2,000 note by the Reserve Bank of India on Friday sparked talk of another demonetisation by the government.

Its introduction, announced in the same Nov. 8, 2016 speech that announced the withdrawal of the older Rs 500 and Rs 1,000 notes, inextricably linked the public memory of the Rs 2,000 with the currency cancellation that eventually turned into demonetisation.

The press release and circular by the RBI have been at pains to use the word ‘withdrawal’ instead of cancellation, but the semantics have been missed by most. The central bank has tried to explain its decision and given a four-month timeline up to September 30, 2023, for the exchange or deposit of these Rs 2,000 notes. Most importantly, it has been said that these notes will continue to remain legal tender.

However, it has also asked banks not to issue Rs 2,000 to the general public, with immediate effect.

But regardless of what the RBI’s intent and nuance in communication are, the scars of the sudden 2016 demonetisation exercise remain fresh in the minds of most. The WhatsApp groups were immediately spewing out erroneous messages that this was another demonetisation exercise. Rumours abounded about how the government was set to track who was making these deposits, as this would act as proof of black money.

Almost immediately, many shops and establishments began putting up boards refusing to accept Rs 2,000 notes.

The fact that the government and the RBI, through their social media and press handles, tried to explain that this currency withdrawal was not going to affect the legal status of these notes as tender was not enough to quell the rumours.

After all, a currency note is a mere piece of paper that acquires its value on the basis of the guarantee that it bears from the government, with the signature of the RBI governor assuring that it carries value worth a certain amount as currency.

When that very RBI issues a press release heralding the withdrawal of a currency note, no matter what the semantics, the public immediately loses faith in transacting with that note. Nobody wants to take the risk of seeing their hard-earned money lose value simply because the note is now out of circulation.

So much so that RBI Governor Shaktikanta Das has had to speak to the public via the media to quell concerns about the timeline of the currency withdrawal and the legal tender status and reassure people that genuine issues will be addressed.

 Even as the pink Rs 2,000 note looks set to end its run as India’s highest denomination currency, if the RBI had its way, it may never have been issued in the first place.

Those with some institutional memory will remember that the RBI under Raghuram Rajan’s governorship had in 2014 suggested the introduction of Rs 5,000 and Rs10,000 notes. The RBI's stance then was that the highest-value currency note, the Rs 1,000 note, had seen erosion in value due to inflation.

In May 2016, the government responded to the RBI and asked them to start printing Rs 2,000 notes. The printing of these higher-denomination notes began the next month.

And then the Nov. 8, 2016 speech by Prime Minister Narendra Modi that simultaneously withdrew high denomination notes of Rs 500 and Rs 1,000 while announcing the introduction of new Rs 500 and Rs 2,000 notes changed the goal post that the RBI had originally intended when it recommended higher denomination currency.

The introduction of the Rs 2,000 notes was strategic and intended to quickly fill the gap in currency circulation caused by the withdrawal of Rs 500 and Rs 1,000 notes. The currency gap caused was 86% of the total notes in circulation. As the printing and circulation of the new Rs 500 notes began later, the bulk of the early remonetisation at the end of 2016 and early 2017 happened using Rs 2,000 notes.

This is also reflected in the RBI’s press release on the withdrawal of the Rs 2,000 note. As per the RBI’s data, about 89% of the Rs 2,000 notes were issued prior to March 2017, which it states is near the estimated life span of four to five years. Most importantly, the RBI stopped printing Rs 2,000 notes in 2018-19.  

The Rs 2,000 notes now amount to just 10.8% of the currency in circulation, or Rs 3.62 lakh crore on March 31, 2023, down sharply from the peak of 37.3%, or Rs 6.73 lakh crore on March 31, 2018.

(Curious questions for Indian numismatics experts: Did the RBI ever issue a Rs 2,000 note signed by Shaktikanta Das, who only took charge in December 2018? Or if the Rs 2,000 notes issued were only signed by his predecessor, Urjit Patel, is that the only instance of that happening in Indian currency history?)

The most important question that remains unanswered even now despite the RBI and government communication on the Rs 2,000 note currency withdrawal and legal tender status is: what happens to this note after Sept. 30, 2023?

If RBI says that it will remain eligible for currency exchange at a bank or its own offices, then the seriousness of the Sept. 30 deadline announced now will get diluted. It may delay the exchange or deposit of such notes by the general public. If there are genuine concerns that these notes have been out of circulation and possibly being used for hoarding black money by some people, then providing an open-ended exercise with no exchange limits would have allowed them to avoid any scrutiny.

There are implications for printing and issuing fresh currency, along with calculations on how much this withdrawal exercise will benefit the deposit accretion of banks as people choose to deposit these notes in their accounts. The timing of the move when there have been concerns over system liquidity shows that banks are hoping this exercise will lead to greater liquidity in the system.

Also, legal tender status withdrawal is a decision that the government has to take and which the RBI has to notify as the currency issuer of the country. The government has not done it so far, so making any statement or commitment on the legal tender status or the deadline would be problematic.

Unlike the demonetisation exercise in 2016, where the stated objectives based on government statements ranged from boosting digital payments to taking action against black money and money laundering to weeding out terrorist activity, here the stated purpose is simply currency replacement. In that sense, as the RBI release and Das’ statement today clarified, it is more in line with the 2013–14 withdrawal of older currency notes under the RBI’s clean note policy.

The RBI would be better prepared this time around for the currency exchange process, as it would have already created buffers of new currency notes to be issued into the system. Most importantly, unlike in 2016, when the automated teller machines had to be recalibrated to handle these new notes, the existing machines are already handling the notes that the RBI will send out to banks as replacements.

What is the cost of such exercises as regular withdrawals and heavy printing on the RBI books? This is a question that we should ask. Also, whether the cost of such exercises justifies such frequent withdrawals and friction in currency management is another question that must be asked. But the demonetisation exercise shows that we rarely get answers since most queries get deflected under secrecy or national security laws.

Also, the unified payment interface is ubiquitous now, and other digital payment modes are also well entrenched, which means that there are unlikely to be any major transactional issues in the economy.

Could there be some rural or semi-urban pockets where frictional issues may arise? Possible, but the actual numbers may not be very big.

Even though the announcement of the withdrawal of Rs 2,000 notes may remind us of the pain people endured at the end of 2016 and 2017, this exercise is unlikely to create the same hardships.

Farewell, dear Rs 2,000 note! Regardless of your legal tender status, your legend will live on in Indian political and financial history for years to come.

T. Bijoy Idicheriah is a senior financial journalist who has been writing on the world of banking and central banking for 17 years.

The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.