• Monday, June 24, 2024
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India pulls highest-denomination notes from circulation

India pulls highest-denomination notes from circulation

Reserve Bank of India plans to phase out Rs2,000 bills by September

India’s central bank sought to calm the public after its decision to withdraw its highest-value currency notes from circulation triggered alarm about financial stability.

The Reserve Bank of India announced on Friday that it would eliminate Rs2,000 ($24) notes, instructing the public to exchange or deposit them at banks by the end of September.

The RBI added the notes would remain legal tender, though it did not clarify for how long.

The cash withdrawal, which begins on Tuesday, echoed Prime Minister Narendra Modi’s controversial decision in 2016 to invalidate Rs500 and Rs1,000 notes overnight, which were equivalent to more than 80 per cent of currency in circulation. Purportedly a crackdown on illicit and untaxed “black money”, the dramatic move forced people around the country to rush to banks to trade in their notes.

RBI governor Shaktikanta Das on Monday downplayed comparisons with the demonetisation in 2016, calling the Rs2,000 note withdrawal part of regular “currency management operations”.

“I do not expect a rush to the bank branches,” he said. “There’s no reason to rush to the bank.”

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The RBI said Rs2,000 notes were introduced as a temporary measure to boost cash supplies after the 2016 demonetisation and that it had stopped printing them in 2019. The notes were not “commonly used for transactions anymore”, the central bank said, adding that they accounted for about 10 per cent of currency in circulation.

Analysts said although the announcement was unlikely to disrupt India’s economy as in 2016, it would ripple through markets as businesses and households handed in their notes.

The rupee weakened 0.05 per cent against the dollar in morning trading in India on Monday.

“Any step like this is disruptive,” said Shumita Deveshwar, senior director at research consultancy TS Lombard. “The difference this time is that they’re giving more time for people to switch their notes over . . . People who don’t have money stashed in an illegal way are going to be OK.”

Economists and businesses have fiercely debated the legacy of the demonetisation policy. While it helped funnel money into the formal financial sector, it caused enormous pain to cash-reliant small businesses that weighed on growth for years afterwards, according to some experts.

The RBI did not cite corruption as a justification for its latest move to recall the Rs2000 notes, but analysts saw the decision at least in part as an effort to “try and stem the hoarding” of currency, Deveshwar said. The purge in 2016 was widely ineffective at identifying illicit funds, with about 99 per cent of the banned currencies returned to banks as legitimate holdings.

HSBC said it expected the RBI’s move to boost banking liquidity as people deposited Rs2,000 notes, adding it could at least temporarily bring down short-term borrowing rates.

But some households and businesses may bypass the banking system altogether by offloading undeclared cash through assets such as jewellery or white goods.

Sunil Ahuja, who owns a home appliances shop in Delhi, said transactions involving Rs2,000 notes had jumped over the weekend. “I am expecting a sales boom over the next two to three months,” he said.

At a jewellery shop in Noida, a satellite city of Delhi, a deluge of customers carrying the high-value notes “has caused a stir”, a shop assistant said. One customer paid an advance of Rs500,000 in wads of Rs2000 notes.

Emkay, a brokerage, said the currency withdrawal could lift consumption “as the unaccounted income might find its way to fuel demand for high-value consumption durables, precious metals and real estate”.

Additional reporting by Hudson Lockett in Hong Kong

Copyright The Financial Times Limited 2023