The Indian central bank has announced another round of demonetization with a plan to withdraw 2,000-rupee notes from circulation. The announcement led to a big jump in gold bullion sales. The 2,000-rupee note will remain legal tender, but they will have to be deposited or exchanged for smaller denominations by Sept. 30.
The 2,000 rupee note ($24.19) is the largest currency denomination in India. According to Reuters, they make up about 10.8% of the currency in circulation. T.V Somanathan, the top official at the Indian Finance Ministry, said confiscation of the 2,000 rupee notes wouldn’t cause any disruptions “either in normal life or in the economy.” His assurances fall flat given history.
We’ve seen this play before. The Indian government announced a surprise demonetization policy in the fall of 2016 meant to drive so-called black money out of the shadows and declared that all of the 1,000 and 500-rupee notes then in circulation would no longer be valid. The suddenly worthless notes made up 86% of the currency in circulation in the country at the time. The move made virtually all of the cash in India valueless.
The government produced new 500 and 2,000-rupee notes to replace the old currency. Now the government is pulling those 2,000-rupee notes out of circulation. The government policy announced in 2016 was meant to force Indians to trade in the old notes for new ones. But there was a catch. The government placed limits on the amount of currency Indians could exchange, but no limits on bank deposits until the end of the year.
The idea was to push Indians into putting their hoarded cash in the bank – thus bringing it “out of the shadows.” The demonetization policy resulted in severe cash shortages. As many as 90% of ATMs in some regions of the country completely ran out of currency. With more time to exchange notes this time around, the latest round of demonetization is not expected to be as disruptive.