India Withdraws Highest Value Bank Notes Months Before Polls

India is withdrawing its highest-value currency note just months before a national election, when cash in circulation typically surges.

People in the country have until September 30 to deposit 2,000 rupee ($24) notes into their bank accounts or exchange them for other denominations, the Reserve Bank of India said in a statement Friday citing its “clean note policy.”

It didn’t say what happens to those unable to meet the deadline but added that as of now the notes remain legal tender.

The move holds echoes of Prime Minister Narendra Modi’s demonetisation decision in 2016, which came weeks before a key state election and was alleged to be a clampdown on spending by political rivals.

While that move removed almost all cash with the public, the latest decision impacts just about 11 per cent of currency in circulation and therefore will probably trigger little chaos.

The RBI said the decision had been taken as the 2,000 rupee note isn’t commonly used for transactions and, “the stock of banknotes in other denominations continues to be adequate to meet the currency requirement of the public.”

“The RBI had already shown an inclination to reduce the usage of 2,000 rupee notes in the economy,” said Rahul Bajoria, an economist at Barclays Plc in Mumbai.

“Unlike the previous episode in 2016, this withdrawal is unlikely to be disruptive for economic activity.”

The value of 2,000-rupee notes in circulation is 3.62 trillion Indian rupees ($44.27 billion). This, the regulator said was about 10.8 per cent of the currency in circulation.

“When 2,000-rupee notes were introduced in 2016 they were intended to replenish the Indian economy’s currency in circulation quickly after demonetisation. However, the central bank has frequently said that it wants to reduce high value notes in circulation and had stopped printing 2,000-rupee notes over the past four years.

“This denomination is not commonly used for transactions,” the Reserve Bank of India said in its communication while explaining the decision to withdraw these notes.

While the government and the central bank did not specify the reason for the timing of the move, analysts point outed that it comes ahead of state and general elections in the country when cash usage typically spikes.

“Making such a move ahead of the general elections is a wise decision,” said Rupa Rege Nitsure, group chief economist at L&T Finance Holdings. “People who have been using these notes as a store of value may face inconvenience,” she said.

In Nigeria, the Central Bank recently came under intense criticism when it decided to redesign some denominations of the nation’s currency and pegged naira withdrawal limits few months to the 2023 general election.