The announcement of the discontinuation of INR 2000 currency note from the system by RBI on Friday reminds one of Narendra Modi-led government’s decision of withdrawal of 86% of the economy’s currency in circulation in 2013-2014.
The announcement of the discontinuation of INR 2000 currency note from the system by RBI on Friday reminds one of Narendra Modi-led government’s decision of withdrawal of 86% of the economy’s currency in circulation in 2013-2014. At time, it withdrew all banknotes issued prior to 2005 from circulation and citizens were required to exchange those notes.
This time too people have been asked to exchange or deposit the notes. However, they have been given four months time to do so (till September 30, 2023). The process of exchanging the notes will begin from May 23. Meanwhile, the banknotes will remain legal tender till September 2023.
But the big question is: how INR 2000 banknote withdrawal is going to affect the Indian economy? Entrepreneur India takes a look.
Dip in black money
With INR 2000 note out of the system, the economy will make movement of black money difficult along with improvement in tax collections. Former Reserve Bank Deputy Governor R Gandhi on Friday said withdrawal of the INR 2,000 bank notes will help in curbing black money to a “great extent” because people are hoarding the high value currency. At present, the value of INR 2000 notes in circulation is 3.62 trillion Indian rupees ($44.27 billion), which is 10.8% of the currency in circulation.
However, it will not cause major disruptions as the notes of smaller quantity are available in sufficient quantity and digital transactions and e-commerce has expanded significantly. But small businesses and cash-oriented sectors such as agriculture and construction could face some inconvenience in the near term, according to experts.
Banking system liquidity to improve
As seen during the time of demonetization, with the withdrawal of the banknote and by giving people the opportunity to deposit or exchange the banknote, the deposit of banks will go up. At a time when deposit growth is lagging bank credit growth, this move will infuse more liquidity in the banking system.
Short-term interest rates to moderate
The improved liquidity will ease the pressure on deposit rate hikes and could also result in a moderation in short-term interest rates as these funds get invested in shorter-term government securities.