Why RBI decided to withdraw the high denomination Rs 2,000 note from circulation

The RBI today decided to withdraw the Rs 2000 note by reasoning the clean note policy. But is it the main reason. Not really.

A big necessity at the time of demonetisation

The issuance of a high denomination note of Rs 2,000 was a necessity at the time of demonetisation because the withdrawal of currency impacted 86 per cent of the total currency in the system. It was not a natural choice to issue such high denomination notes. The Rs 2,000 notes helped in pushing more currency into the system to support the economy.

Encouraging hoarding of high denomination notes

The Rs 2,000 note was encouraging hoarding of such high denomination notes by black marketeers as it was easy to store and exchange. In fact, these notes soon started disappearing from the market. The banks were complaining about not getting enough Rs 2,000 notes as all banks have had  recaliberated their ATMs to accommodate Rs 2,000 notes.

Increase of lower denomination Rs 500 notes

There was always a plan to issue lower denomination note, but that takes time because economy needed the currency back to start normal operations. Today, these notes constitute only 10 per cent of the total notes of currency in circulation.

Continuation of fake and counterfeit notes

One of the objectives of issuing new notes was to discourage fake and counterfeit notes. Higher denomination was also encouraging the fake and counterfeit industry. Take, for example, the numerical Rs 2,000 was seen when the note is held against light. Similarly, there were other features.

Mini-demonetisation for notes hoarders

RBI's Friday move is like a mini-demonetisation as Rs 2,000 notes worth Rs 3.62 lakh crore are still in the system. Those who are holding such currency in large quantity have to explain the source of such a large cash if they are depositing or exchanging such notes. If these notes don’t come back, RBI will demonetise them. They will no longer be legal tender. This will be a gain for the RBI as they no longer have the liability to pay.

WATCH: Rs 2,000 denomination banknotes withdrawn, will continue as legal tender; What happens to your notes? Know RBI’s advisory on exchange, deposit of Rs 2,000 notes