The Rs 2,000 note was never meant to live forever.
Barely two years after its rollout, the RBI crushed it in the crib halting production in 2019. The following year or so, as ATMs cranked out fewer pink notes, India's highest denomination note moved one step closer to the cemetery. On Friday, the central bank pulled the plug, officially announcing its burial. They will, however, remain legal tender until further notice.
Over the past five years, the RBI had flushed out Rs 3 lakh crore worth Rs 2,000 notes out of the system without saying a word. As a percentage of total currency in circulation, its share reduced from 50.2% in FY17 to 10.8% in FY23.
One may wonder why the central bank made a public announcement to withdraw Rs 2,000 notes when it could have continued with the silent purging until the value reached a negligible amount. For one, the decision coming suspiciously close to the 2024 general elections will help avoid hoarding and misuse of high denomination notes.
Importantly, it may help reduce currency in circulation and ease pressure on deposit rate hikes.
With the current stock of Rs 2,000 notes worth Rs 3.6 lakh crore going out of circulation after September, 30, Anil Gupta, Sector Head - Financial Sector Ratings, ICRA Ratings believes two things will likely happen. One, the central bank may print more Rs 100, Rs 200 and Rs 500 notes to make up for the shortfall. Two, we could likely see a reduction in the total currency in circulation, which currently stands at Rs 34.8 lakh crore.
Another useful outcome, though short-term, will be a reduction in interest rates as Rs 3.6 lakh crore worth currency marches its way into banking vaults.
"As witnessed during demonetisation, we expect the deposit accretion of banks could improve marginally in near term. This will ease the the pressure on deposit rates hikes and could also result in moderation in short-term interest rates," noted Karthik Srinivasan, Senior Vice President Financial Sector Ratings, ICRA Ratings.
The planned demise of the pink notes also raises a pertinent question about India's ideal currency mix and if Rs 500 will remain the country's highest denomination?
FROM OUR ARCHIVE | RBI's love affair with Rs 2,000 notes seems to be coming to an end
Until now, the high denomination duo of Rs 500-Rs 1,000 (until 2016) and Rs 500-Rs 2000 (from FY17) comprised over 80% of total currency in circulation. But now with Rs 500 denomination notes alone accounting for over 70%, the urgent question that's doing the rounds is if the Rs 1,000 note will make a grand comeback?
As for the phasing out of Rs 2,000 notes, the writing was on the wall.
The first biggest hint was visible in 2018 itself. As RBI's FY18 annual report showed, the decline in volume, value and printing of Rs 2,000 notes clearly pointed out the central bank's conscious efforts to reduce our reliance on large denomination notes.
Fewer, or no new pink notes were printed in FY18 as their rise in total currency mix remaining unchanged at 3.3%. Such flat growth rate of the highest denomination notes was a first in at least 20 years! The Rs 1,000 note, which was until 2016 the highest denomination, never recorded muted growth either in volume or value since 2001, when it was re-introduced.
In terms of value, Rs 2,000 notes share in total currency in circulation fell from a peak of 50.2% in FY17 to 37.3% in FY18. Subsequently, in FY18, it further dipped to 31.2% in FY19, 22.6% in FY20, 17.3% in FY21, and 13.8% in FY22. FY23 data is due to be published next week, but as RBI indicated, it's share now stands at 10.8%.
In terms of value, if in FY17, there was Rs 6.6 lakh crore worth of these notes, it peaked to Rs 6.7 lakh crore in FY18 and then, the downslide began. Its value reduced gradually to Rs 6.5 lakh crore in FY19, plunged to Rs 5.5 lakh crore in FY20, Rs 4.9 lakh crore in FY21, Rs 4.3 lakh crore in FY22 and finally to Rs 3.62 lakh crore in FY23.
On the other hand, the Rs 500 denomination notes began their ascent. From 22.5% in FY17, it more than trebled to 73.3% in FY22, implying that Rs 500 could be the cornerstone of our currency mix for now. In terms of value, it increased from about Rs 3 lakh crore in FY17 to Rs 22.8 lakh crore in FY22.