Centre’s decision to withdraw Rs. 2000 notes from circulation

Subject :Economy

Section: Monetary Policy

Specifics:

Not demonetization: Firstly the note will continue to be legal tender, even though public is encouraged to deposit/exchange these by 30^th September.
Extended window for deposit/exchange.

Reasons:

Exact reason not given, but the RBI’s stand is to discourage high value notes.
And these were introduced as a means of filling the currency vacuum created by demonetization in a short period of time, hence the high value.
The withdrawal decision is seen in view of upcoming assembly and general elections, which see high cash demand.

Impact on:

economy:
Not likely to be major, as Rs. 2,000 notes constitute only about 10% of currency in circulation
But small businesses and cash intensive sectors like agriculture and construction could see some disruption in short term.
Banking:
With 30^th sept deadline, Banks will see their deposits rise.
Bank liquidity will increase with higher cash holdings.
Bond Market:
As banks invest the excess deposits in government securities, we will see a short term drop in market interest rates in government bonds.