Context: THE RESERVE Bank of India (RBI) announced the withdrawal of its highest value currency note, Rs 2,000, from circulation, adding that the notes will continue to be legal tender. 

• The Reserve Bank of India (RBI) has decided to withdraw Rs 2000 denomination banknotes from circulation as part of its “Clean Note Policy.”

• The withdrawal is similar to a previous withdrawal of notes in 2013-2014 (and not the demonetization).

• It said the existing Rs 2,000 notes can be deposited or exchanged in banks until September 30, but set a limit of “Rs 20,000 at a time”.

About Legal Tender

• It is a type of currency or medium of exchange. 

• It is money that is valid and acceptable for the settlement of debts which must be recognized when issued.

• Almost every country uses its national currency as legal tender.

• Creditors are lawfully responsible for accepting legal tender for the repayment of debt that they have availed.

• Legal tender is constitutioned by a law that specifies the object to be utilised as legal tender and the organisation that is commissioned to create and issue the same to the public such as the Reserve Bank of India.

• In India, the authentic legal tender of the Reserve Bank of India consists of coins and notes. The creditors are supposed to accept them as a payment towards the debt.

About the Rs 2000 Notes

• The Rs 2000 denomination banknote was introduced in November 2016 under Section 24(1) of RBI Act, 1934.

• It primarily aimed to meet the currency requirement of the economy in an expeditious manner after withdrawal of the legal tender status of all Rs 500 and Rs 1000 banknotes in circulation at that time.

Reasons for withdrawal

• Demonetization purpose served: Printing of Rs 2000 notes was stopped in 2018-19 as other denominations became available in adequate quantities.

• Clean Note Policy: This aims to provide good-quality currency notes with enhanced security features and withdraw soiled notes from circulation.

• Ending timespan: Majority of the Rs 2000 notes were issued prior to March 2017 and have reached their estimated lifespan of 4-5 years.

• Disappeared from circulation: This denomination is not commonly used for transactions, and there is sufficient stock of banknotes in other denominations to meet public requirements.

Impact and financial analysis

• Deposit accretion of banks may improve in the short term, similar to the demonetization period.

• Improved deposit rates may reduce pressure on interest rate hikes and lead to moderation in short-term interest rates.

Clean Note Policy

• Previously, banknotes issued before 2005 were withdrawn due to fewer security features.

• Notes issued before 2005 are still legal tender but no longer in circulation to maintain consistency with international practices.