Saturday, 17 December 2016

₹500 NOTE – Pivot note of the currency in circulation

On 8/11/2016 around 8.30 PM, our Prime Minister made a theatrical announcement through the television channels that:


“To break the grip of corruption and black money, we have decided that the five hundred rupee and thousand rupee currency notes presently in use will no longer be legal tender from midnight tonight, that is 8th November 2016. This means that these notes will not be acceptable for transactions from midnight onwards. The five hundred and thousand rupee notes hoarded by anti-national and anti-social elements will become just worthless pieces of paper. The rights and the interests of honest, hard-working people will be fully protected. Let me assure you that notes of one hundred, fifty, twenty, ten, five, two and one rupee and all coins will remain legal tender and will not be affected.”

[Click http://pib.nic.in/newsite/erelease.aspx   Then go to 8th November 2016 and look for "Text of Prime Minister’s address to the Nation"]

After two days of this announcement, I exchanged couple of ₹500 & ₹1000 notes at a bank counter. In return, I received two new pink ₹2000 notes. When I tried to exchange these new pink notes for change, I realised that there was hardly change for that and people are holding the lower denomination notes as a precious commodity. The next lower denomination available for change is ₹100 note. That means you need 20 nos. of ₹100 note to get change for the new ₹2000 note. Due to scarcity of change, I soon realised that the lower denominations notes in the system are not able to meet the liquidity demand.

This was the reason for me to visit the website of  Reserve Bank of India (RBI) to find the distribution of each denomination notes existing in the system. Each year, RBI, in its Annual Report publishes the statistics of the total currency in circulation by March end; and information is provided denomination-wise. Also, every week RBI publishes the total currency in circulation. However, this data is limited to the total currency in circulation and not sharing denomination-wise distribution as in the annual report. The table below is reproduced from the RBI Annual Report of 2015-16.

My disclaimer

This is my disclaimer.

Before start reading my blog, you should kindly go through this.

I am not an economist. I am a civil engineer by profession.

Before 8/11/2016, I seldom bothered about currency or RBI and not used to read anything related to them. Yep, that day, when our Prime Minister came to the TV channels around 8.30 PM and made that theatrical announcement, with all his trademark gesticulations and dramatic voice modulations, to demonetize ₹500 & ₹1000 notes and introduced ₹2000 note as a panacea for eliminating the hoarding and black money.