How is the Reserve Bank of India (RBI) move to withdraw currency notes issued before 2005 going to work?
RBI will withdraw all currency notes printed before 2005 from circulation and has requested the public to exchange such notes at bank branches. Although these notes will remain legal tender, from July onwards, any individual exchanging more than 10 notes of R500 or R1,000 will need to show proof of identity. However, if the individual is already a customer of the bank, the person can exchange any number of notes without providing proof of identity.
Will the RBI move reduce counterfeit notes circulating with the public?
Since currency notes printed before 2005 had fewer security features, the incidence of counterfeiting of these notes was said to be high. Therefore, by withdrawing these notes, RBI intends to curb the volume of counterfeit notes in the system. The pre-2005 notes do not carry the year of printing on the back as the newer notes do, making it easier to identify for the public.
By the end of March 2005, the notes in circulation were 36,984 million pieces, and during 2004-05, total counterfeit notes detected were 181,928 pieces.
However, since RBI has time and again received old notes for shredding, the number of pre-2005 printed notes in circulation could be far less. During 2012-13, 498,252 pieces of counterfeit notes were detected. Data from RBI shows that, by the end of March 2013, currency notes in circulation totalled 73,517 million pieces.
Will this withdrawal reduce the amount of illicit money that finds its way into the formal financial system?
The withdrawal of the pre-2005 currency notes requires individuals to give proof of identity if they turn in more than 10 notes of R500 or R1,000 after July 1. However, the individual can turn in any number of notes at a bank branch if she is an existing customer of that bank. But even after July 1, the money can be used to buy goods and services throughout the country—that is, it will continue to be legal tender. The move is to curb counterfeit notes and not with an intention to impact illicit money flow. The onus of curbing illicit money lies with fiduciary agents and not RBI. The central bank has already tightened KYC norms of banks and the mandated requirement of a PAN card for cash deposits over R50,000 serves the purpose to curb illicit money.
Further, to curb illicit money, RBI