A shopkeeper counts Rs 2,000 notes at a jewelery shop in Mumbai. , Photo Credit: PTI
TeaThe first thing that comes to mind when talking about the value of currency is the exchange rate that it commands in international transactions. For example, we can ask how many cents are worth a rupee. Another is its purchasing power within the economy, that is, whether it can buy the same basket of goods over time. Inflation erodes the value of money over time. But there is a more fundamental sense in which the value of a currency is to be understood, and it has nothing to do with prices. This has to do with the trust that citizens have in their continued acceptance of it as a medium of exchange and store of value. This confidence is based on the trust they place in their monetary authority, which is the central bank.
RBI’s reputation
Reserve Bank of India (RBI) on 19 May Announces that ₹2,000 note is being withdrawn from circulation But it will continue to be legal tender. Also, it advised the public to hand over their ₹2,000 notes by September 30, which were to be exchanged for notes of lower denominations. The reason for this move is that it is a part of the ‘Clean Note Policy’. This is not clear, because if the objective was to remove soiled notes from circulation, the existing Rs 2,000 note should have been made convertible into a new note of the same denomination. Economists in sync with the current government have rushed to support the RBI’s latest move. One argument is that such high denomination notes are used only by a small section of the population. The second is that it will ensure that hoarding of black money ends. Actually, these arguments do not enhance the credibility of RBI. First, it shouldn’t have taken the RBI much time to recognize in 2016 that the ₹2,000 note issued after demonetisation of much lower denomination notes was likely to be used by a few people for most transactions in India. low monetary value. In retrospect, it is credible that at that time there were not enough new notes to replace the demonetised notes, i.e., there was an unconscious lack of preparation. The government probably wanted to demonstrate that it had quickly restored currency reserves. Due to higher denomination notes, the need of a large section of the population to transact in much lower denomination notes has not been considered. At the time of demonetisation, the official rationale was that it was a way to eliminate counterfeit currency. We now know that this did not happen, as almost all demonetised notes were returned to the banks. If the government’s economists now say that withdrawing Rs 2,000 notes will end black money hoarding, then they should acknowledge the folly of printing the same notes immediately after demonetisation in 2016. Noted for his role in promoting illegal economic activities, money laundering and terrorism. The Reserve Bank of India, which mostly copies economic ideas from the West, seems to have missed it. If the form chosen for hoarding unaccounted money today was indeed the ₹2,000 note, it could be said that the RBI facilitated its accumulation by issuing a higher denomination note in 2016.
The 2016 demonetisation slowed down growth within half a year. It is unlikely that the withdrawal of the ₹2,000 note would result in anything similar, as it is still legal tender. But surely the uncertainty it creates cannot be good for business. People engage in economic activity with a view to earning profit, be it in the form of profit or wages. When some portion of currency in circulation is suddenly withdrawn for no apparent reason, the effect is small, as economic actors continue to speculate about the money value of their future earnings. India has seen a steady private investment rate for almost a decade. This could hardly have been a good time to tamper with the currency.
poor judgment
A central bank sits at the apex of a country’s financial system. The public expects the highest level of integrity from him. But apart from integrity, the central bank must also convey efficiency, transparency and fairness. For more than 50 years, the RBI had mostly lived up to this expectation. In particular, the public saw it as a transition from being servile to Britain’s colonial interest in India to a relatively independent central bank of an independent country with high economic ambitions. The demonetisation of 2016 tarnished this reputation. And now, within a few short years, the RBI has come up with yet another action of questionable value. By undoing its action of introducing the ₹2,000 note, it draws attention to poor judgment on its part.
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In 2016, the government amended the RBI Act of 1933 to redefine monetary policy as the control of inflation. The RBI in its new avatar has not had much success. It has missed the target inflation rate of 4% for 14 consecutive quarters. However, its consistent messaging gives the impression that it is singularly dedicated to the task of controlling inflation. Maybe it is. But by casting a shadow over the public’s perception of what legal tender is in India, their faith in the rupee becomes shaky. In the importance of Being Earnest, Oscar Wilde said how the cynic knows the price of everything and the price of nothing. We have been given proof of this.
Pulapre Balakrishnan is an economist