RBI’s Decision to Withdraw Pre-2005 Notes: All You Need To Know!

(image source: moneycontrol.com)

A lot of decisions taken by the RBI (Reserve Bank of India, the central bank of the country) go unnoticed by the public at large not because they do not affect them but because they do not relate to the day – to – day affairs. This time, though, Raghuram Rajan (the RBI Governor) has touched a raw nerve. This week, we try and simplify this decision and its consequences for us and the economy at large.

The decision in brief:

The RBI has announced that all currency notes (including Rs. 500 and Rs. 1000 notes) which have been printed before 2005 will be withdrawn from the market from 1^st April, 2014.

Anyone who has these notes can go to a bank and exchange them for notes printed in or after 2005 from 1^st April, 2014 to 30^th June, 2014 without any questions asked or documents sought.

From 1^st July, 2014, however, anyone who wants to exchange more than 10 Rs. 500 and Rs. 1000 notes will have to show a proof of identity and address IF they DO NOT have an account in the bank where they want to exchange these notes.

How to identify whether your note is pre-2005 or not?

We have put up an image of the back of a 100 rupee note here. In the middle of the note, a year is mentioned in a very small font. This refers to the year in which the note was printed. If no year is mentioned in your note, then it means that it was printed before 2005 and you need to exchange it.  In other words, even if 2005 is mentioned, you don’t need to worry.

Why was this decision taken?

The central bank maintains that this is just an attempt to replace less secure notes with more secure ones. The notes printed in or after 2005 have greater security features and hence this decision can reduce the instances of fake currencies in the country. If we look internationally, it is a standard practice to withdraw old series notes.

Consequences of the decision:

Let’s first look at it from an individual’s point of view:

Potential Problem: From an individual point of view, this has the potential to cause certain issues in undertaking transactions. In fact, as soon as such a decision is announced, people start finding out the details and it won’t surprising if shops start checking the year on the notes before accepting them.

Fact: The RBI has not taken this decision all of a sudden. In fact, it has been withdrawing these old notes from banks in a routine manner. So a large number of pre-2005 notes have already been off the market. What remains are only those notes which have been neither banked nor used for a long time (9 years to be precise).

 Now, we look at what effect it will have on the economy:

From the point of view of the economy, this decision could actually act as a stimulus as all the cash that  was stashed in homes will now flow into the formal economy. This is because not everyone would want to disclose their funds to their banks and may rather prefer to indulge in spending the money by purchasing gold or real estate.

In order to ensure that the transition is smooth, the RBI needs to create more awareness among people (more so the traders and shopkeepers) so that there is no inconvenience to the general public.