India withdraws higher denomination banknotes from circulation

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India’s central bank has sought to calm public opinion after its decision to withdraw its higher-value banknotes from circulation raised financial stability alarms.

THE Reserve Bank of India it announced on Friday it would phase out Rs 2,000 ($24) notes, ordering the public to exchange or deposit them with banks by the end of September.

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

The cash withdrawal, which begins on Tuesday, echoed that of Prime Minister Narendra Modi controversial decision in 2016 invalidating 500 and 1,000 rupee notes overnight, which amounted to more than 80% of the currency in circulation. Allegedly a crackdown on illicit and untaxed “black money,” the dramatic move has forced people across the country to rush to banks to exchange their bills.

RBI Governor Shaktikanta Das on Monday downplayed comparisons to demonetisation in 2016, calling the withdrawal of R2,000 notes part of normal “currency management operations”.

“I don’t expect a run on bank branches,” he said. “There’s no reason to run to the bank.”

The RBI said the Rs 2,000 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 no longer “commonly used for transactions”, it said said the central bank, adding that they accounted for about 10 percent of the money in circulation.

Analysts said though the announcement is unlikely to disrupt The economy of India as in 2016, it would cross the markets as businesses and households handed over their banknotes.

The rupee weakened 0.05% 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 are giving people more time to change their notes. . . People who don’t have illegally hidden money will be fine.

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

The RBI did not cite corruption as a justification for its latest move to recall Rs2000 notes, but analysts saw the decision at least in part as an effort to “try to curb hoarding” of the currency, Deveshwar said. The purge in 2016 was largely ineffective at identifying illicit fundswith around 99 percent of banned currencies being returned to banks as legitimate holdings.

HSBC said it expected the RBI’s move to boost bank liquidity as people deposited 2,000 rupee notes, adding it could at least temporarily lower interest rates on short-term loans.

But some households and businesses can bypass the banking system altogether by dumping undeclared money through assets like jewelry or appliances.

Sunil Ahuja, who owns an electrical appliance store in Delhi, said transactions involving rupee 2,000 notes rose over the weekend. “I expect sales to boom in the next two to three months,” he said.

At a jewelry store in Noida, a satellite city of Delhi, a deluge of customers carrying the high-value banknotes “caused a stir,” said a salesperson. A customer paid an advance of Rs500,000 in bundles of Rs2000 notes.

Emkay, a broker, said the currency pullback could boost consumption “as unaccounted income could find its way to fuel demand for high-value consumer durables, precious metals and real estate.”

Additional reporting of Hudson Lockett in Hong Kong