Dinesh Kamath's Editorial 'Pros and cons of RBI’s move' that was published in Newsband

Pros and cons of RBI’s move

The Reserve Bank of India has decided to withdraw from circulation all currency notes issued prior to 2005. The objective of the RBI move could be to flush out unaccounted money and either bring it back into the system or strip it of its value. The RBI move will also help eliminate counterfeit notes from the system. The RBI’s move will make life difficult for those who have hoarded currency notes. The timing of the move is just ahead of general elections.

But is it equally applicable to all denominations? Keeping out Rs. 20, 10 and 5 denominations out of this exercise may be desirable as black money is hardly in these denominations.

This move is commendable since counterfeiting of Indian currency is very common and our neighboring countries are reportedly using counterfeit currency to devalue the INR and stoke inflation. But the fact remains that a large amount of currency is in the 'black' market. One of the unintended consequences of this move is that black money will now flow into assets. We can expect a spike in gold prices and perhaps real estate as well. But by far the major impact will be on how people view currency notes in the future. This will modify the cash only mentality and force more to adopt other instruments for their transactions.

This move will also have its negative side. This move will result in lot of problems for common man. From now onwards, people and shops will refuse to accept any currency note issued before 2005 and there will be chaos.

The year printed on the notes issued from 2005 onwards is on the backside of note and it is in a very small size. It can be found and read, perhaps, only under a magnifying glass. People in general and particularly illiterate and visually handicapped persons will find it difficult to distinguish between the pre-2005 and post-2004 notes.

Unless these notes reach banks, where they will be ultimately detected as invalid, they will continue to be in circulation, which is akin to having counterfeit notes in circulation. Moreover, even if an ordinary citizen finds himself being given a pre-2005 note by a shopkeeper, bus conductor etc. is he expected to refuse it or accept it and take the trouble of exchanging it in a bank, waiting for his turn in serpentine queues?