Demonetization of 2000 Rupee Note.
Is this rerun of 2016? NO! Some points to consider.
The Reserve Bank of India issued a circular on May 19, 2023, withdrawing the 2000 Rupee note from circulation. This is a non-event; hence, I do not want to indulge in a detailed explanation. Here are few points to consider:
The withdrawal was expected: The 2000 rupee note was always a stop-gap arrangement. It was going to be withdrawn all along.
Currency design is a science: What denominations of coins and notes to have and how many notes of each denomination to mint or print is a science. The idea is to have different denominations and numbers of notes such that it is easy to give exact change for most price points. Refer to the papers mentioned in the notes. The INR 2000 note did not fit in the sequence or the numbers without the INR 1000 note in the mix. The ideal way is to stop at INR 500 note.
The challenge with large denomination notes: Governments do not want to issue high denomination notes. A large number of high-denomination notes makes it easy for money laundering and incentivises black money. To prevent cash transactions, governments impose carrying costs by keeping most denominations low. Even the US $100 note is not that common in normal transactions.
The source of anti-India financing: The high denomination notes have enabled anonymous financing of anti-India activities. This was evident in stone throwers of Kashmir, to Maoist insurgents in the Naxal belt, to terror groups in North East. The presence of INR 2000 note may have enabled the CAA and Farm bill protests.
Timing of the withdrawal: I suspect this would be withdrawn in 2020 after the farmer protests. However, as COVID struck, these plans had to be moth-balled.
5-D chess, anyone?: You may think of this move coming one year ahead of the election to disrupt the cash spending of illegally sourced money by politicians. I do not think so. The COVID response delayed this decision and eventually saw the light of the day.
Some knock-on effects
The decision will have some knock-on effects. There may be the following effects:
Reducing currency in circulation, which should be tempered by digital transactions.
The bank deposit base may expand, allowing additional liquidity in the system. This may make inflation control a bit more complicated but not serious.
Finally, withdrawing INR 500 and INR 1000 notes in 2016 resulted in a weird reality that RBI cannot admit. The RBI received more notes than it printed. The current INR 2000 withdrawal will test whether things are in line this time or not.
Notes:
On the optimal spacing of currency denominations, Leo van Hove & Bruno Heyndels, European Journal of Operational Research 90 (1996) 547-552
The Optimal Denomination of Currency, Adrian E. Tschoegl; Journal of Money, Credit and Banking, Vol. 29, No. 4, Part 1 (Nov., 1997), pp. 546-554