RBI phases out Rs. 2,000 notes from circulation

22 May 2023 , 01:25 PM

Of course, it did briefly bring back memories of November 2016 when demonetization had virtually brough the entire cash transaction system to a standstill. However, the phasing out of Rs. 2,000 currency note was never going to be anything drastic. There are several reasons for that.

Most stores had stopped accepting Rs. 2,000 currency notes long back and tellers and bank ATMs have not been disbursing Rs. 2,000 notes for the last 2 years. Clearly, the smaller denomination notes were doing a good job of managing the currency needs of people. Here is what prompted the RBI to withdraw the Rs. 2,000 currency notes.

What triggered the withdrawal of Rs. 2,000 notes

It may be recollected that the Rs. 2,000 currency note was introduced post demonetization in November 2016 with a very clear shelf life of about 4-5 years. Since the Rs. 500 and Rs. 1,000 denominations had been withdrawn in November 2016, there was the need for an alternate high value currency and the Rs. 2,000 note filled that gap. Since adequate bank notes of smaller denominations were available, the RBI had already stopped printing the Rs. 2,000 notes in FY19 itself. 

The importance of the Rs. 2,000 note has been gradually diminishing over the last few years. For example, as of date, the 89% of the existing Rs. 2,000 notes in circulation were issued prior to March 2017. The total value of the Rs. 2,000 notes in terms of face value had already fallen from Rs. 6.73 trillion in March 2018 down to just Rs. 3.62 trillion as of March 2023. While the Rs. 2,000 note accounted for 37.3% of notes in circulation in March 2018, it only accounted for 10.7% of notes in circulation in March 2023. To avoid the risk of soiled notes, the RBI has already adopted the Clean Note Policy and from that perspective also, the phasing out of the Rs. 2,000 notes fit in.

The point is Rs. 2,000 notes will continue to remain legal tender even in the future. However, currencies are never about being legal tender but about popular acceptance. In the last couple of years, the acceptance of Rs. 2,000 had already come down drastically. The combination of UPI and the surge in digital transactions only made high denomination currency notes all the more redundant. There will certainly be an effort in phasing out these notes, but it is unlikely to be anything as disruptive as 2016. For the RBI, the Rs. 2,000 note had just outlived its purpose.

What to do if you have Rs. 2,000 denomination notes?

That is the million dollar question. What should people do if they already have Rs. 2,000 denomination notes lying with them. Would the notes become worthless with immediate effect or would they continue to be in use. RBI has already instructed banks to stop disbursing Rs. 2,000 notes with immediate effect. In case, you are in possession of the Rs. 2,000 denomination notes, there are 4 choices in front of you.

1. You can use the currency notes before the phase out deadline of September 30^th 2023. However, while you are currently permitted to transact in Rs. 2,000 denomination notes, the question is of acceptance. Already, most outlets are not accepting Rs. 2,000 notes over the last year or so and now with the announcement, people would only get more cautious. It is very unlikely that you would get people willing to transact in the Rs. 2,000 denomination notes.

    

2. The second option is that you can walk into any bank and just exchange the Rs. 2,000 notes for smaller denominations. This window will be available from 23^rd May 2023 till 30^th September 2023. During this 4 month window, you can exchange the notes anytime. However, such exchange is subject to an outer limit of Rs. 20,000 per visit. Also, the bank is likely to insist on basic KYC details like PAN and Aadhar. The Rs. 20,000 limit is only for operational convenience.

    

3. The third option is to deposit the cash into your bank account. There are no limits set and you can technically deposit any number of Rs. 2,000 denomination notes into your account. Then you can use the funds at your disposal. However, any cash deposit into your bank account would be subject to Know Your Client (KYC) regulations as applicable from time to time. Here it must be mentioned that there are certain reporting conditions that the bank must meet under the extant Know Your Customer (KYC) norms and other applicable Statutory requirements. For instance, banks are required to comply with Cash Transaction Reporting (CTR) and Suspicious Transaction Reporting (STR) requirements, where applicable. Specifically, very large cash deposits in the bank account could be red-flagged for a deeper probe.

    

4. What if the person is not able to either exchange or deposit the Rs. 2,000 denomination notes by 30^th September 2023? Remember, that post September 2023, you cannot deposit the Rs. 2,000 denomination note in any commercial bank. However, since the Rs. 2,000 note is still a legal tender, you can still get it exchanged from the designated offices of the RBI. It would be a better idea to get these done well before the deadline of 30^th September 2023.

This time around, the phasing out of the Rs. 2,000 notes is likely to be a lot more organized. Also, the implications for the general public are likely to be limited.

The real trigger was the explosion in UPI transactions

Today, you need not be surprised if the local cabbie or even the small vendors request you to pay online using the ubiquitous UPI / Wallet platforms like Google Pay, Phone Pe and Paytm. It is simple. You just scan the code and the payment is directly made through the app in a jiffy. What is material is not just that India has shifted at amazing speed towards digital cash, but the volumes that are happening on the UPI platform. Just consider these numbers.

• We will not get into the mindboggling growth story between 2016 till 2022 as that is already well documented. Let us look at the value of transactions for FY23 first. Out of the total retail credit transfer transactions worth Rs. 550.12 trillion in FY23, UPI transactions accounted for Rs. 139.15 trillion, or approximately 25.29% of the total value of all credit transfer transactions.

   

• Let us look at April 2023. Out of the total retail credit transfer transactions worth Rs. 48.34 trillion in April 2023, UPI transactions accounted for Rs. 14.16 trillion, or approximately 29.28% of the total value of all credit transfer transactions.

   

• Let us now turn to the volume of transactions. Out of the total retail credit transfer volumes of 9,837 crore transactions in FY23, UPI transactions accounted for Rs. 8,371 crore transactions, or approximately 85.10% of the total volume of transactions in the financial year FY23.

   

• Let us look at the volume of transactions in April 2023. Out of the total retail credit transfer volumes of 1,005 crore transactions in April 2023, UPI transactions accounted for Rs. 886 crore transactions, or approximately 88.2% of the total transaction volumes in the month of April 2023.

If there is one set of data that has given the RBI confidence to do away with the Rs. 2,000 denomination note, it is the frenetic pace of growth in UPI transactions in India. One of the surprising outcomes of the 2016 demonetization was the rampant spread of digital money and digital transactions in India. In this transition, UPI and mobile wallets have played a big role. It is this rapid digital transition that should ensure that the withdrawal of the Rs. 2,000 denomination note should be smooth, and largely, uneventful.