The RBI as cash slasher
The inconsistency, abruptness and lack of concern on the value of the Indian Currency this has come to define the RBI.
At least this time, the demonetisation of the Rs 2000 note by the government is not a shock not least because ‘once bitten, twice shy’. Trust in the monetary authority suffered a body blow in the aftermath of the last decision. Memories, especially of events leading to destitution and death, are long-lived and frame expectations of the future.
The act of 2016 was unique in the annals of monetary history because conditions like hyperinflation did not exist. This time, the RBI has sent out a communication by way of explanation to officers of all banks on May 19, 2023. Sentence by half sentence, the letter is striking for the absence of sense. The opening line reminds us of the illogical explanation lamely trotted out later that Rs 500 and Rs 1000 notes had been withdrawn so as to stamp out illegal activities associated with these ‘high-denomination’ notes. A higher-denomination note of Rs 2000 was issued to fill the absence! Indeed, the RBI author seems to trip and stumble by the claim that this withdrawal is “in pursuance of the “Clean Note Policy” of the RBI”. Any note can get mutilated. Is evidence of counterfeiting of Rs 2000 notes overwhelming?
What can “fulfilment of the objective of introduction of Rs 2000 denomination” and “majority of the Rs 2000 denomination notes … have completed their lifespan …” mean?! The death of the note is defined by the RBI extinguishing this liability with the general public.
The two expressions back to back in the subject of the letter contradict each other, “Withdrawal from circulation; Will continue as Legal Tender”. People have until the end of September 2023 to exchange their Rs 2000 notes for other notes at banks. The last phrase in the subject of the letter is the note “will continue as legal tender” (my emphasis). The two sentences are inconsistent. By a familiar logic, notes that are known to be scraps of paper on September 30 will carry zero value on September 29 which becomes, then, the new termination date, and so on. The next few months evaporate and Rs 2000 will not be accepted in the fulfilment of contracts today. Legal tender does not have a shelf life. Crypto currencies will come and go but fiat money endures. The conclusion that presses is that the RBI is unconcerned about the value of the rupee directly. The job is inflation targeting and the value of money indirectly.
If the notes “are not observed to be commonly used for transactions anymore”, they will fade out of existence. Why the fanfare provoking a run to the banks like the last time? The notes are held involuntarily when wages are paid and people make withdrawals from banks, especially in the informal sector. We can only hope that waiting in lines in the hot sun do not end in tragedies as they did in 2016.