Why is India withdrawing 2,000-rupee notes?

KARACHI: The Reserve Bank of India (RBI) has announced withdrawal of banknotes of rupees 2,000 denomination. People holding currency of this denomination can deposit them or exchange with other banknotes before September 30, the central bank said.

The RBI said banknotes of this denomination will continue to be legal tender which implies a consumer can purchase goods by these banknotes. The RBI has not clarified the status of these notes after September 30. However, it has said that its instructions on the INR 2,000 notes will be effective until that date.

The 2000-rupee notes were introduced in November 2016, after withdrawal of legal tender status of all INR 500 and 1,000 banknotes by the Modi government. The government had withdrawn 86 percent of the economy’s currency in circulation.

The demonetisation of INR 500 and 1,000 notes had rattled the banking system as Indians flocked bank branches and ATMs to get their notes exchanged to legal tender. This sudden move left many citizens in anger at the abruptness of the move.

When 2000-rupee notes were introduced, they were intended to replenish the Indian currency in circulation quickly after demonetisation. However, the central bank has frequently said it wants to reduce high value notes in circulation and had stopped printing INR 2,000 over the past four years.

While the central bank did not specify the reason for the timing of withdrawal, analysts point out it comes ahead of state and general elections in the country when cash usage typically spikes. The value of 2,000-rupee notes in circulation is 3.62 trillion Indian rupees ($44.27 billion). This is about 10.8 percent of the currency in circulation.

The printing of 2,000 denomination notes was stopped in 2018-19, and they are no longer commonly seen with the public – unlike the ubiquitous INR 500 and 1,000 in 2016.