RBI moves against Indian Currency notes issued before 2005

January 27, 2014 | Posted by bobbysrinivasan << back to blog

What differentiates the currency issued prior to 2005?

First, the year of issue of currency will not be printed on the reverse side of the currency.

Second, the security features of currencies issued after 2005 are enhanced by increase in grammage and electrolyte water mark to use of optically variable (color shifting) printing. This will make counterfeiting more difficult.

RBI has decided to remove from circulation Indian currency notes issued before 2005 from July 1, 2014. According to them, the amount in circulation ending March 31, 2005 was Rs. 3.61227 trillion rupees (1 trillion = 10¹²) of which Rs. 1.94810 trillion rupees where in denominations of 500 and 1000.

The real objectives of withdrawing currencies could be manifold. Let us try to enumerate them.

The current currency value in circulation is around 11 trillion rupees of which 3.6 trillion were issued before March 2005; when they are replaced. The RBI would have a complete record of how much money is in circulation like the amount with banks, individuals, etc. (Currently plenty of cash is sitting in bank lockers and individual hands). They can then relate the rate of inflation with the money in circulation. The efforts made by RBI in the past to control inflation did not work. Dr. Subba Rao, former RBI governor raised repo rate 13 times and inflation rate still continued to surge. The increased repo rates didn’t correctly predict as to how much money was still left in circulation.

Dr. Raghuram Rajan with his policy implemented will have a complete control over monies in circulation. He can then target controlling the inflation rate much better

If old currencies in large sums are brought to the bank, the bank could ask for identify proof. This may discourage the black money holders to approach the bank. Instead they may try to exchange their old currencies with the new currency (Printed after March 2005) for a deep discount. Arbitrage opportunities become available for a small guy, as he can always justify his cash holdings when he exchanges his old notes.
Election time when the voters take money to vote will be confused about the validity of currencies which they received. This will discourage them from accepting cash to vote
Real estate dealings with black money will see a serious challenge. The cash offered by the buyers to the sellers of real estate will pose a threat to the sellers, as they may end up receiving invalid currencies
Really nobody knows as to how much counterfeit money is in circulation. This will hopefully eliminate illegal money and possibly lower inflation
As Raghuram Rajan said inflation is the worst enemy to an ordinary citizen, illegal (black) and counterfeit money do add to increase demand for goods and services which then pushes prices up.

Let us all look forward to the day when our country is free of black and counterfeit money. This will guarantee lower inflation rate and will bring happiness to an average citizen who is currently overwhelmed by the increases in the cost of living.

<< back to blog