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The Reserve Bank of India (RBI) announced on May 19, 2023, that the Rs 2000 denomination banknotes would be phased out of circulation as per the ‘clean note policy.

If you possess cash denominations of Rs. 2000, you must deposit all the bankrolls in your bank account or exchange them for other denominations at any bank. You have time from May 23 to September 30, 2023.

People have all the reason to believe that this will be another disruption after the demonetization, which came into effect when 86% of India’s currency in circulation was scrapped. However, the central bank of India urges Indian citizens not to worry since the withdrawal will follow a “time-bound” and systematic strategy to avoid disruptions and maintain normal operational convenience.

MPVD & Associates, a top CA firm and tax consultancy in Kolkata, has pledged to provide assistance and financial advice to all clients, businesses, and people in various financial scenarios. To prevent misunderstanding and panic, we address the subject in this post.

Withdrawal of Rs 2,000 Currency Notes: What is it All About?

The central bank has given the public two options:

  • Deposit all Rs 2000 banknotes in cash possession into their bank accounts

  • Go to any bank branch after May 23, 2023, and exchange Rs 2000 banknotes for banknotes of other denominations up to a maximum of Rs 20,000/- at a time.

Bank deposits of the banknotes would be unrestricted by maximum deposit limits and subject to current instructions, normal know-your-customer (KYC) norms, and other regulatory requirements. Meanwhile, the exchange of Rs 2,000 banknotes into permissible denominations will start on May 23, 2023, with a limit of a maximum of Rs 20,000/- which means you can only exchange 10 notes at a time.

The Status Before May 23, 2023

The central bank has stated that it will prioritize seamless transactions. The 2000 denomination banknote will continue to be legal tender even after September 30, 2023. The public is encouraged to forfeit all Rs. 2000 notes in their possession. Until September 30th, Rs. 2000 notes can still be used to purchase goods and services.

The latest circular makes no mention of what would happen if the Rs. 2000 notes are not exchanged or deposited in banks by the deadline of September 30. The Governor of the Reserve Bank of India, Shaktikanta Das, stated that if all of the Rs 2000 notes are not returned to circulation, a deadline extension may be considered, although nothing has been confirmed as of yet.

The Overall Impact of 2000 Rupee Note Withdrawal in India

There aren’t many people who have that many 2000 rupee notes. According to the RBI Governor, the impact of this withdrawal will be “very very marginal”.

According to RBI data, the amount of money in circulation in the form of 2000 rupee notes is Rs 3.6 lakh crore. 89% of that amount is made up of 2000 notes issued before March 2017, with a life expectancy of 4-5 years. That means only 10.8% of the currency is in circulation and is subject to withdrawal. And the lower number could be an indication of less disruption and overall impact.

However, the withdrawal of high-value currency notes may lead to a temporary economic slump – just as demonetization caused a temporary slowdown in India’s economic growth. The withdrawal of 2000 rupee notes could cause inconvenience, particularly for small businesses and cash-oriented sectors such as agriculture and construction that have not endorsed digital payment facilities. It is unlikely to create significant disruption for organizations that have implemented digital payment systems.

ICRA Senior Vice President of Financial Sector Ratings Karthik Srinivasan said that, similar to the situation during demonetization, we anticipate that bank deposit accretion could increase marginally. This will relieve pressure on deposit rate hikes and may result in short-term interest rate stabilization.

The Clean Note Policy Behind Withdrawal of 2000 Rupee Notes in India

The “Clean Note Policy” is a set of standards and actions adopted by central banks and financial organizations to keep banknotes in circulation in good condition. The policy’s principal goal is to ensure that the currency notes in circulation are clean, free of damage, and suitable for use in financial transactions.

The Reason Behind Withdrawal of 2000 Rupee Notes in India

It all started with the demonetization policy that took place in India in November 2016, which involved the withdrawal of the 500 and 1,000-rupee notes in circulation as legal tender. The policy aimed to curb black money, counterfeit currency, corruption, and the funding of illegal activities.

The removal of high-value currency notes resulted in several adverse consequences for the Indian economy. The major goal of introducing Rs 2,000 notes in November 2016 was to address the economy’s currency requirements efficiently and reduce disruption following demonetization.

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