RBI’s Clean Note policy: Why the central bank decided to withdraw Rs 2,000 notes from circulation

The Reserve Bank of India (RBI) recently declared the withdrawal of Rs 2,000 notes from circulation, citing the implementation of the “clean note policy” as the reason. The policy was implemented by the central bank to guarantee the availability of high-quality banknotes to the general public. As for the Rs 2,000 notes, the RBI has stated that the currency will retain its legal tender status. The general public is permitted to use Rs 2,000 banknotes for their transactions and can also accept them as payment. The central bank has urged individuals to either deposit or exchange these banknotes by the deadline of 30 September.

The primary objective of the Clean Note Policy is to provide the public with currency notes and coins of high quality, equipped with enhanced security features, while simultaneously removing soiled notes from circulation. As part of the clean note policy, banks and financial institutions are obligated to remove worn-out or damaged notes from circulation and replace them with fresh ones.

The RBI consistently oversees the quality of currency notes in circulation and establishes criteria for determining their acceptability. The central bank released a significant portion of Rs 2,000 denomination notes before March 2017. These notes have now reached the end of their expected lifespan of four-five years.

As a component of its clean note policy, RBI issued a statement in December 2013, instructing banks to exchange even soiled notes from non-customers and distribute only high-quality clean notes to the public. The introduction of the Rs 2,000 note took place in November 2016 as per Section 24(1) of The RBI Act, 1934. The primary purpose behind its issuance was to promptly fulfil the currency needs of the economy after the withdrawal of legal tender status from Rs 500 and Rs 1,000 notes. Once this objective was achieved and a satisfactory quantity of notes in other denominations became available, the printing of Rs 2,000 notes ceased in the fiscal year 2018-19.

The total value of these banknotes in circulation decreased from Rs 6.73 lakh crore, accounting for 37.3 percent of the notes in circulation at its peak on 31 March 2018, to Rs 3.62 lakh crore, which now represents only 10.8 percent of the notes in circulation as of 31 March 2023.

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