CLEAN NOTE POLICY

1. Context

The Reserve Bank of India (RBI) has decided to withdraw the Rs 2000 denomination banknotes from circulation. But existing notes will continue to be legal tender, the RBI announced. The central bank has advised the public to deposit Rs 2000 banknotes, which were introduced after Rs 500 and Rs 1000 notes were withdrawn during the demonetization exercise six years ago, into their bank accounts and /or exchange them into banknotes of other denominations at any bank branch.

2. Why has the RBI withdrawn Rs 2000 notes?

The Rs 2000 note was introduced in November 2016 under section 24(1) of the RBI Act, 1934, primarily with the objective of meeting the currency requirements of the economy expeditiously after the legal tender status of Rs 500 and Rs 1000 notes was withdrawn.
With the fulfillment of that objective, and once notes of other denominations were available in adequate quantities, the printing of Rs 2000 notes was stopped in 2018-19.
The RBI issued the majority of the Rs 2000 denomination notes before March 2017; these notes are now at the end of their estimated lifespan of 4-5 years.
This denomination is no longer commonly used for transactions besides, there is adequate stock of banknotes in other denominations to meet currency requirements.

3. Clean Note Policy

The Clean Note Policy seeks to give the public good-quality currency notes and coins with better security features, while soiled notes are withdrawn out of circulation.
The RBI had earlier decided to withdraw from circulation all banknotes issued before 2005 as they have fewer security features as compared to banknotes printed after 2005.
However, the notes issued before 2005 continue to be legal tender. They have only been withdrawn from circulation in conformity with the standard international practice of not having notes of multiple series in circulation at the same time.

4. Will the Rs 2000 banknotes continue to be legal tender?

The Rs 2000 banknote will continue to maintain its legal tender status, the RBI has said.
Members of the public can continue to use Rs 2000 banknotes for their transactions and also receive them in payment.
However, they are encouraged to deposit and/ or exchange these banknotes on or before September 30, 2023, the RBI said.

5. Exchanging and Depositing Rs 2000 Notes

The exchange limit for Rs 2000 banknotes is set at Rs 20,000 at a time. Non-account holders can also exchange these banknotes at any bank branch.
Deposits into bank accounts can be made without limitations, subject to compliance with know your customer (KYC) norms and other applicable regulations.

6. Impact

The RBI governor stated that the impact of the withdrawal of 2000 rupees notes will be "very very marginal" on the economy because it accounts for only 10.8% of currency in circulation.
The withdrawal will not cause disruption "either in normal life or in the economy" as there is an adequate stock of banknotes in other denominations.
Some economists said that the withdrawal of the higher-value note is "a sensible form of demonetization" and could boost bank deposits at a time of high credit growth.
The withdrawal could ease the pressure on deposit rate hikes and could also result in a moderation in short-term interest rates and would help to curb black money and corruption.

7. Is there a limit on how much money you can exchange or deposit?

You can exchange Rs 2000 banknotes up to a limit of Rs 20,000 at a time. You don’t have to go to your bank a non-account holder of a bank also can exchange Rs 2000 banknotes up to a limit of Rs 20,000 at a time at any bank branch.
The exchange of Rs 2000 banknotes can also be made through business correspondents up to a limit of Rs 4000 per day for an account holder.
Deposits into bank accounts can be made without restrictions subject to compliance with extant Know Your Customer (KYC) norms and other applicable ones.

8. Could there be a repeat of the demonetization chaos of 2016?

It is unlikely that bank branches will witness chaos and long queues like in 2016 this time. The printing of Rs 2000 notes was stopped in 2018-19, and they are no longer commonly seen by the public, unlike the ubiquitous Rs 500 and Rs 1000 notes in 2016.
Also, the decision to withdraw Rs 500 and Rs 1000 notes was announced suddenly, taking the public by surprise. The exchange of Rs 2000 notes will begin only on May 23, so banks and the public have sufficient time.

9. What is Legal tender in India?

A legal tender is a form of currency that is recognized by law as an acceptable means for settling debts or obligations.
RBI is responsible for determining which forms of currency are considered valid for transactions.
It consists of coins issued by the Government of India under Section 6 of The Coinage Act, 2011, and banknotes issued by the Reserve Bank of India under Section 26 of the RBI Act, 1934.
Govt issues all coins up to ₹ 1,000, and 1 Rupee Note. RBI issues currency notes other than ₹ 1 Note.

10. Types of Legal Tenders in India

Legal tender can be limited or unlimited in character.
In India, coins function as limited legal tender. Coins with denominations equal to or higher than one rupee can be used as legal tender for amounts up to one thousand rupees.
Additionally, fifty paise (half a rupee) coins can be used as legal tender for amounts up to ten rupees.
Banknotes function as unlimited legal tender for any amount stated on them.
However, A new Section 269ST was added to the Income Tax Act as a result of the measures taken by the Finance Act 2017 to curb black money.
A cash transaction was restricted by Section 269ST and was only allowed to be worth up to Rs. 2 Lakh per day.

For Prelims: Reserve Bank of India (RBI), section 24(1) of the RBI Act, Clean Note Policy, Know your customer (KYC), Demonetization, Section 6 of The Coinage Act, 2011, Section 26 of the RBI Act, 1934.

For Mains: 1. What are the historical precedents for demonetization in India? How was the 2016 demonetization different from the previous ones? (250 Words)

Previous year Question

1. Which one of the following statements correctly describes the meaning of legal tender money? (UPSC 2018)

A. The money which is tendered in courts of law to defray the feel of legal cases

B. The money which a creditor is under compulsion to accept in settlement of his claims

C. The bank money in the form of cheques, drafts, bills of exchange, etc.

D. The metallic money in circulation in a country

Answer: B

Source: The Indian Express

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