New notes for old

The move by the Reserve Bank of India to withdraw from circulation all currency notes issued prior to 2005 is interesting indeed. These notes will be legal tender until March 31, and from April 1 holders will have to exchange them with banks for new ones. Two months thereon — that is, from July 1 — those wanting to exchange more than 10 such notes of Rs.500 or Rs.1,000 denomination will have to provide proof of identity and residence if they go to a bank where they do not regularly transact. In the interim period, it is not known if banks have to note down details of those exchanging such notes and pass them on to relevant authorities. But obviously they will have to do so if the objective of the RBI move is what it is widely believed to be: to flush out unaccounted money and either bring it back into the system or strip it of its value. Those who are hoarding currency notes issued before 2005 right now will have to get it out into the open either to transact until March 31 or to exchange with banks. It will not be easy to get large volumes of currency into the system unnoticed in such a short period. Even if some of it does get exchanged, the RBI will not mind that as it would have achieved the objective of getting such money into the legal system.

The RBI move will also help eliminate counterfeit notes from the system. Notes issued after 2005 have security features built into them that are absent in counterfeit currency. As of December 31, 2004, the value of notes issued and in circulation was Rs.3,43,658 crore as per RBI data. That is approximately the amount of older currency that will need to be exchanged before the RBI closes the window. As of now it has not specified any time limit for the exchange. To be sure, some part of that would have been already replaced in the normal course by the RBI. But it will be safe to assume that a good part is still in the system given that the value of notes in circulation has shot up to Rs.11,40,621 crore as per latest available data (January 11, 2013). Sceptics can still point out that not all black money is held as cash and not all unaccounted cash will be in the form of notes issued prior to 2005. While that may be true, the fact remains that the RBI’s move will make life difficult for those who have hoarded currency notes. The timing of the move, just ahead of general elections, is also interesting. It is no secret that unaccounted money plays a major role in funding elections in this country, and in recent times to even buy votes through cash inducements. The RBI’s move may or may not dent the finances of the politicians, but one thing is clear: it is a good step to get at least a part of the stock of unaccounted cash back into the system.