India pulls highest-denomination notes from circulation

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Reserve Bank of India plans to phase out Rs2,000 bills by September

India’s central bank sought to calm the public after its decision to withdraw its highest-value currency notes from circulation triggered alarm about financial stability.

The Reserve Bank of India announced on Friday that it would eliminate Rs2,000 ($24) notes, instructing the public to exchange or deposit them at banks by the end of September.

The RBI added the notes would remain legal tender, though it did not clarify for how long.

The cash withdrawal, which begins on Tuesday, echoed Prime Minister Narendra Modi’s controversial decision in 2016 to invalidate Rs500 and Rs1,000 notes overnight, which were equivalent to more than 80 per cent of currency in circulation. Purportedly a crackdown on illicit and untaxed “black money”, the dramatic move forced people around the country to rush to banks to trade in their notes.

RBI governor Shaktikanta Das on Monday downplayed comparisons with the demonetisation in 2016, calling the Rs2,000 note withdrawal part of regular “currency management operations”.

“I do not expect a rush to the bank branches,” he said. “There’s no reason to rush to the bank.”

But some households and businesses may bypass the banking system altogether by offloading undeclared cash through assets such as jewellery or white goods.

Sunil Ahuja, who owns a home appliances shop in Delhi, said transactions involving Rs2,000 notes had jumped over the weekend. “I am expecting a sales boom over the next two to three months,” he said.

At a jewellery shop in Noida, a satellite city of Delhi, a deluge of customers carrying the high-value notes “has caused a stir”, a shop assistant said. One customer paid an advance of Rs500,000 in wads of Rs2000 notes.

Emkay, a brokerage, said the currency withdrawal could lift consumption “as the unaccounted income might find its way to fuel demand for high-value consumption durables, precious metals and real estate”.

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