India to scrap its 2,000-rupee note
India is to withdraw the 2,000-rupee – its highest denomination note – from circulation later this year, the Reserve Bank of India (RBI) has announced.
The central bank said the note, introduced into circulation in 2016, will remain legal tender but people have been asked to deposit or exchange these notes by 30 September 2023.
The note was introduced after the government withdrew 86% of the currency in circulation overnight; on 8 November 2016 Prime Minister Narendra Modi gave only four hours’ notice to announce that all 500 and 1,000 rupee notes – effectively 86% of India’s cash – would no longer be valid.
However, since then the RBI has frequently said that it wants to reduce high value notes in circulation and had stopped printing 2,000-rupee notes over the past four years. “This denomination is not commonly used for transactions,” it said.
While the government and the central bank did not specify the reason for the timing of the withdrawal, analysts point out that it comes ahead of state and general elections in the country when cash usage typically spikes.
“Making such a move ahead of the general elections is a wise decision,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. “People who have been using these notes as a store of value may face inconvenience,” she said.
However, unlike in 2016, this latest move won’t create the upheaval seen in 2016, he said. “This withdrawal will not create any big disruption, as the notes of smaller quantity are available in sufficient quantity,” said Nitsure. “Also, in the past six to seven years, the scope of digital transactions and e-commerce has expanded significantly.”
For the country’s banks, the move might be a positive one, as a potential influx of cash could help boost bank deposits, at a time when deposit growth is falling behind the growth of credit.
This will ease the pressure on deposit rate hikes, said Karthik Srinivasan, group head, financial sector ratings at rating agency ICRA Ltd.
India to remain fastest-growing G20 economy in coming years
US credit rating agency Moody’s is predicting that India will be the fastest-growing G-20 economy for the next few years, largely because of a young workforce, increasing urbanisation and rising government spending on infrastructure.
However, Moody’s report also pointed to some potential bumps in the road for India’s economy, saying red tape could slow the setting up of businesses, which would in turn hamper economic growth.
The agency added that the country’s bureaucracy may drive away foreign investors to other Asian destinations such as Indonesia and Vietnam. “India’s higher bureaucracy in decision-making will reduce its attractiveness as a destination for foreign direct investment, especially when competing with other developing economies in the region,” said Moody’s Investors Service.
It added that limited reforms to business regulations could also harm India’s growth prospects, increasing the time it takes to set up a business. It said: “Lack of certainty around the amount of time needed for land acquisition approvals, regulatory clearances, obtaining licenses and setting up businesses can materially prolong project gestation.”
However, Moody’s also noted the government’s efforts to reform the economy. It said recent reforms including making the labour laws more flexible, improving the agricultural sector’s efficiency, expanding investment in infrastructure, incentivising investment in manufacturing and strengthening the financial sector will help India’s economy.
The Moody’s report came as the RBI said that the country’s growth trajectory was steady, revealing that India’s economy sustained the growth momentum witnessed in the previous fiscal quarter of 2022-23.
And earlier in May, the United Nations had projected that the Indian economy would grow by 6.7% in 2024, as one of the few bright spots in a generally gloomy world economy.
