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  • Writer's pictureFIC Hansraj

Currency Carnage: Unravelling the Chaos of Currency Exchange

In a surprising move, India's central bank made a major announcement on 19 May 2023 revealing its intention to bid farewell to the Rs 2,000 notes merely seven years after their debut on 8 November 2016. The Reserve Bank of India (RBI) emphasized that while the notes would lose their place in circulation, their status as legal tender would persist.


Beginning May 23, the central bank has announced that individuals can exchange their notes at 19 regional offices of RBI and various bank branches. They have the option to swap the withdrawn currency for lower denomination notes or deposit it directly into their bank accounts. This exchange or deposit facility will be available until September 30 2023, allowing ample time for transactions. To ensure smooth operations, the central bank has set a limit of exchanging notes valued up to Rs 20,000 at a time. These guidelines are alluring enough that the note would cease legal tender after that date.

The Clean Note Policy implemented by the Reserve Bank of India (RBI), which seeks to ensure that citizens have access to fresh and crisp currency notes and coins while withdrawing worn-out notes from circulation, quickly gained significant attention and was cited as the rationale for this action.



Routine Too Mainstream In an effort to combat illicit activities such as black money circulation, tax evasion, terrorist financing, and counterfeit currency, the economy underwent a demonetisation process in November 2016 in which two of the highest-value currency notes ceased to be considered as legal tender. With time, the introduction of the Rs 2,000 note was highly criticised as it made storing black money even easier and the instances of black money seizure continued.


If the objective was to remove soiled notes from circulation, then they should have been replaced with fresh notes of the same denomination. No matter how much the central bank and the government accentuate its Clean Note Policy, this move may be the economy's way of rectifying mistakes done in the past.

As per the central bank's statement, the Rs 2,000 notes aren’t commonly utilized for transactions. They highlighted a significant decline in the number of these notes involved in transactions, from a peak value of Rs 6.73 lakh crore in March 2018 making up 37.3% of the circulating notes to Rs 3.62 lakh crore in March 2023 representing only 10.8% of the circulating notes. This not only raises questions about the rationale behind the introduction of the new note, but it also prompts us to contemplate the government's decision-making abilities. People endured the unfortunate fate of standing in never-ending queues, while hospitals turned into currency exchange centres, denying treatment when presented with old currency notes. Amidst this turmoil and distress, the underlying purpose and justification behind these actions still remain a question.


Barely a Blip

According to the government, no perceptible effect on the economy is expected till now as the currency will either be replaced or deposited. No significant increase in bank liquidity, tax collection and seizure of black money is expected as people have numerous avenues to change the colour of their money. Also, newspapers reported an anticipated rush to jewellery shops to exchange notes.

Likewise, the initiative is not expected to have a significant effect on MSMEs or the agriculture sector. Since the majority of MSMEs operate within the GST network, they are not heavily reliant on large denominations like Rs 2000 currency notes.


But if an economy suddenly chooses to eliminate its highest denomination currency note, it would be highly unlikely for such a decision to have no discernible impact. This significant change is poised to impact multiple facets, prompting the question of its potential consequences.


Matter of Faith

The central bank holds a paramount position within a nation's financial system. The public has high expectations for the bank's unwavering integrity. However, beyond integrity, the central bank also demonstrates competence, transparency, and equity to effectively fulfil its role.


Although this move doesn’t seem to show instant effects on banking, agriculture sector, MSMEs, inflation, money supply etc. it may still erode the value of the currency over time. Inflation and exchange rates are the two things which come to mind when we talk about the value of the currency, but there is a more fundamental sense in which the value of a currency is to be understood, and it has nothing to do with prices. It has to do with the confidence that citizens have in its continued acceptance as a medium of exchange and store of value. This confidence is based on the trust that they repose in their monetary authority, which is the central bank.


The demonetisation measure implemented in 2016 sparked inquiries and had a detrimental impact on the economy. Now, as the central bank introduces another plan of uncertain value, it invites further contemplation and assessment. By revisiting its own decision to introduce the Rs 2,000 note, the central bank inadvertently draws attention to its past lapses in judgment. The amendment of the RBI Act 1933 in 2016 aimed to redefine monetary policy in terms of inflation control. Despite not achieving the targeted 4% inflation rate for 14 consecutive quarters, the central bank's consistent messaging creates the impression of unwavering dedication to combating inflation. Perhaps this commitment is genuine. However, the unintended consequence of raising doubts about the public's perception of legal tender in India undermines their confidence in the stability of the rupee.


Sources:

RBI

The Economic Times

The Hindu

Outlook


Author: Priyansh Kotiya

Illustrator: Ojas Arora








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