Rs 2000 was transitory note to fill in value lost due to demonetization

  • July 3, 2023
  • Posted by: OptimizeIAS Team
  • Category: DPN Topics
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Rs 2000 was transitory note to fill in value lost due to demonetization

Subject : Economy

Section: Monetary policy

In news: “It was a transitory kind of note to fill in the value which was lost in demonetisation”, says former MD of Bharatiya Reserve Bank Note Mudran Private Ltd.

Key Points:

  • It was said that after demonetisation, done by banning Rs 500 and Rs 1,000 notes, there was a sudden currency withdrawal, and to fill that gap in a timely manner the Rs. 2,000 notes were issued.
  • It may be noted that RBI issued a whole new series of notes of the denomination of Rs 500 and Rs 2,000, and new notes for Rs 10, 20, 50, 100 and Rs 200.
  • Case for high denomination notes:
    • As economy grows and inflation rises then automatically the relative value of the current highest denomination comes down. The country then requires higher denomination, otherwise we would not be able to handle normal day-to-day payment transactions.
    • It is also said that normally the highest denomination is meant for store of value and not for medium of exchange.
    • Both the arguments though prove weak, when financial institutions and tools are as developed as today.
  • Problem with high denomination notes:
    • the anonymity of currency makes it an attractive means of payment in illegal transactions and a desirable store of value for criminals.
    • It facilitates tax evasion, avoiding capital controls, money laundering, funding of criminal activity and of terrorism.
Why Japan keeps considering abolishing of cash

  • Japan has been having a near zero and even negative interest rate for decades as a measure to stimulate demand and investment in a country stuck in permanent deflation. In case of a negative interest rate, money kept in bank reduces with time, or alternately when you take out a loan, you have to return less than what you took.
  • It has been said that abolishing currency (especially high denomination notes) would help eliminate the zero lower bound (or effective lower bound) on interest rates. Eliminating large denominations lowers the effective lower bound. This is because if the bank system has a negative interest rate, the cash held in hand (is earning 0% interest) will still be exchangeable with a bank deposit. Thus people will hold cash to escape negative interest rates.
  • Thus with cash the interest rate can therefore not go below zero by more than the “carry cost of currency” — the cost of storing, insuring and safekeeping currency plus any cost of transacting using currency rather than other means of payment.
  • Getting rid of only large denominations lowers the effective lower bound on interest rates rather than eliminates it.

India’s UNESCO World Heritage Sites series of currency notes

The entire new series showcases UNESCO World Heritage Sites present in India:

  • Rs 500 note has Delhi’s Red Fort; the Rs 100 note has Rani ki Vav from Gujarat;
  • Rs 50 note has Hampi from Karnataka;
  • Rs 20 note has Maharashtra’s Ellora caves,
  • Rs 10 note has Konark Temple from Odisha.
  • Rs 2,000 note, has Ajanta paintings on the bottom panel in addition to image of Mangalyaan
economy Rs 2000 was transitory note to fill in value lost due to demonetization