8 mins read . 23 May 2023
Any demonetization or withdrawal of a particular currency denomination in India, brings back memories of November 2016. That was when demonetization was undertaken to clean up the financial system and push the payment model towards a digital skew. While the pros and cons can be debated, one thing is certain that digitization of money has happened in a big way in the last 6 years.
Of course, we will look at that in detail later, but for now, let us focus on the latest decision by the RBI to withdraw the ₹2,000 notes from circulation. It will be done in a phased manner over a period of 4 months, so there is no disruption. From the perspective of individuals, 3 questions arise. Firstly, why was the decision to withdraw the ₹2,000 notes taken now? Secondly, what is the solution if people are holding ₹2,000 currency notes? Thirdly, will impact financial liquidity?
To answer this question, we must appreciate that these high denomination ₹2,000 notes had stopped being popular tender for quite some time. Tellers and ATMs were not giving out these notes and shops were mostly averse to dealing in ₹2,000 currency. Prima facie, the impact of the withdrawal of the ₹2,000 note would be very limited. Perhaps, the RBI and the government are convinced that these notes can now be withdrawn without too much of a hassle. But, there is more to it.
At the outset, we must remember that the ₹2,000 currency note will continue to be legal tender even in the future. It is not like the notes will be worthless overnight. However, in 2016, the ₹2,000 note was introduced as a stop-gap measure and these notes have a shelf life of only 4-5 years. With smaller denomination notes picking up, RBI had stopped printing the ₹2,000 notes in early 2019. It is just the old stock that is being withdrawn.
Statistically, the withdrawal of these notes makes sense. Nearly 90% of the ₹2,000 notes in circulation today are those printed before March 2017. The total outstanding ₹2,000 notes in circulation are down from Rs6.73 trillion to just Rs3.62 trillion in the last 6 years. The share of these ₹2,000 notes has also fallen in the last 6 years from 37.3% of notes in circulation to just 10.7%. In short, there is ample evidence that the ₹2,000 note had outlived its utility and its withdrawal would be smooth and uneventful.
One question people are asking is; what to do with the ₹2,000 denomination notes you possess? There are broadly 3 options in front of you.
Option 1: The first option is to walk into any bank branch and exchange the ₹2,000 notes for smaller denominations. RBI will keep this window at bank branches open from 23rd May 2023 to 30th September 2023. Each exchange is subjected to a limit of Rs20,000 for the sake of convenience. Basic KYC details like PAN and Aadhar would be required.
Option 2: The second option is to deposit the cash into your bank account. Here there are no limits and you can deposit any number of ₹2,000 notes into your KYC compliant bank account. Such funds can be immediately used for other purposes. There is a catch if you are depositing very large amounts of cash into your bank account. Banks must comply with Cash Transaction Reporting (CTR) and Suspicious Transaction Reporting (STR), where applicable. Large cash deposits could be the subject of deeper review.
Option 3: You can continue to transact in the ₹2,000 notes till the cut-off date of 30th September 2023. The problem is that most outlets are already refusing to accept the ₹2,000 notes. With this announcement, it would be very tough to transact. The good news is that it will continue to be a legal tender even after 30th September. You can still get it exchanged at the designated offices of the RBI.
However, the best option for you is to either deposit in the bank account or exchange at the bank counters during this 4-month window.
In reality, the rampant spread of the unified payment interface (UPI) gave the RBI and government confidence that the withdrawal will not matter. Today, you can scan a QR code with Google Pay, Amazon Pay, or Phone Pe for anything from groceries to cab fares to apparel. Just consider these data points.
For FY23, out of the total retail credit transfer transactions worth Rs550.12 trillion, UPI transactions accounted for Rs139.15 trillion. That is a whopping 25.29% of the total value of all credit transfer transactions and only NEFT transactions are bigger.
The real picture lies in the number of transactions on UPI. In FY23, out of the total retail credit transfer volumes of 9,837 crore transactions, UPI transactions accounted for Rs8,371 crore transactions. That is an impressive 85.1% of total volume of transactions.
Not only have UPI numbers grown consistently in the last 6 years since its launch, but it now dominates the payment ecosystem in India with its incomparable reach and simplicity. Beyond the rough and tumble of numbers, it is this big ticket UPI growth that gives confidence to the RBI and government about smooth withdrawal of the ₹2,000 currency notes from circulation. In the last 6 years, Indian consumers have decisively moved away from cash transactions and towards digital transactions. The ₹2,000 note hardly had much of a role left.
Content Source: RBI Website