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Friday, February 28, 2014

Currency Notes Rollback

(Published in Assam Tribune on dated 23-02-2014 at Editorial Page)
Dr. Devajit Mahanta

The Reserve Bank of India (RBI) issued the circular that after March 31, 2014, will completely withdraw from circulation all bank notes (10, 20, 50, 100, 500 and 1,000 rupee notes) issued before 2005.  The objective of the new circular based on two main pillars, first rationalization of currency notes with better security features and second flushing out the unaccounted or black money stored in bank and personal lockers. The RBI says the rationale is to remove pre-2005 notes from the market because they have fewer security features compared to bank notes printed after 2005.

Now the question arises how general public will know if the rupee note they have is pre-2005 and what`s supposed to do with notes issued before 2005? These notes can be easily identified by check the reverse side of the currency notes where notes have the year of issue printed in the middle of the bottom row whereas the pre-2005 notes do not have this features. If you have such notes you will continue to be use in exchange for goods and services till 31 March and from first April to first July 2014 customer can approach any bank to exchange pre-2005 notes. In case if any customer not able to meet the first July deadline then customer have to go through some limitations like if customer wants to exchange more than 10 of the Rs.500 notes or Rs.1000 notes, then require to furnish proof of identity and residence for changing these at a bank where he or she does not have an account. Customer can exchange any number of notes through their own bank account. However, the bank existing rules on depositing and withdrawing cash will remain same. If account holder deposits cash above Rs.50000 the bank will ask for PAN card number and if deposit above Rs.10 lakh in a month, a system generated cash transaction report will go to Financial Intelligence Unit (FIU) and income tax authorities.

Going by the RBI’s Annual Report for 2004-05, 36,984 million pieces of notes valued at Rs 3,61,229 crore will be impacted as they are issued. Out of 421 million Rs.1000 notes valued at Rs.42082 crore and 3055 million Rs.500 notes valued at Rs.152728 crore. The RBI new circular will make it difficult for those who have a huge amount of money to short the notes and get them exchanged. If we look back to history to curb unaccounted money RBI demonetized Rs.1000 and Rs.10000 bank notes which were then in circulation were demonetized in January 1946. Again 1000, 5000 and 10000 rupee notes were re-introduced in 1954 and these bank notes were again demonetized in January 1978, of these Rs.1000 note was reintroduced later. Every time unaccounted or black money holder finds out the ambiguity and loopholes in the law and take the advantage of that. But for the first time RBI declared based on certain year to rollback of all currency notes to flash out unaccounted money and hoping that this time there has to be some success. Still sincere effort by Government and RBI require in certain aspects like unaccounted or black money holder may buy gold or any foreign currency like dollar, euro etc. through the hawala route instead of going to the bank of exchange of notes and gets a tax notice. Also require to monitor that such high value notes could go in for more spending through the cash route or they may approaching agent who will swap the notes for a commission. RBI generally manages currency in India and Government decides on various denominations of notes to be issued. RBI coordinates with the Government in the designing and security features of the notes. Also on behalf of the Government estimates the quantity of notes that are likely to needed denomination wise and accordingly printed out.

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