Can Reserve Bank of India's decision on Friday to withdraw Rs 2,000 bank note be called demonetisation? That's a tricky question to answer. Technically, no. It's not demonetisation because the RBI is not making the notes worthless. The idea is RBI takes back all the Rs 2,000 notes from the economy and probably destroys them. RBI's best hope is that there won't be any Rs 2,000 note floating in the economy after September 30 because it would have got it all back.
However, if the RBI does not get back all the Rs 2,000 notes, then there remains the question if these notes will continue to remain a legal tender. Now, if such a situation were to arise, which is not completely unlikely, then the RBI probably has the option to either stretch the deadline to return the notes or issue a notification that Rs 2,000 notes are no longer valid. RBI sources have told Business Today that RBI does not have the power to demonetise.
So, perhaps, the government might have to step in and formally say that the Rs 2,000 note is no longer valid. But since there's likely to be very less number of such notes in circulation by September 30, assuming people return the notes, it will definitely not be as alarming a deal as the previous demonetisation. But, in best case scenario, the RBI will hope that such a situation does not arise and it gets all the Rs 2,000 notes back. Another scenario is that after September 30, people might have to go to RBI to exchange the scrapped notes.
"Members of the public are encouraged to utilise the time up to September 30, 2023 to deposit and/or exchange the Rs 2,000 bank notes," the central bank said.
Finance Secretary TV Somanathan told BT TV, "Rs 2,000 note has served its need and it is time to move on to smaller denominations. Our aim is to encourage digital transactions. Rs 2,000 note continues as a legal tender."
While the RBI did not specify a limit for depositing the Rs 2,000 currency notes in bank accounts, exchange of a maximum of Rs 20,000 (10 notes of Rs 2,000) for other currency notes will be allowed at a time.
One of the reasons why the RBI has withdrawn Rs 2,000 denomination bank notes from circulation is because the denomination is not commonly used for transactions by the public. The RBI said that the value of these notes has declined over the years and constitutes only 10.8 per cent of the notes in circulation as of March 31, 2023.
The Rs 2,000 denomination bank note was introduced in November 2016, primarily to meet the currency requirement of the economy in an expeditious manner after the withdrawal of legal tender status of all Rs 500 and Rs 1,000 bank notes in circulation at that time.
"A majority of the Rs 2,000 denomination notes were issued prior to March 2017 and are at the end of their estimated life-span of 4-5 years. It has also been observed that this denomination is not commonly used for transactions. Further, the stock of banknotes in other denominations continue to be adequate to meet the currency requirement of the public," said RBI in a statement on Friday.
The RBI also said that this decision is in pursuance of the "Clean Note Policy" - a policy to ensure the availability of good quality notes to the members of the public.