Phasing out Rs 500, Rs 1,000 notes won't affect market liquidity: Patel

Reserve Bank of India Governor Urjit Patel
On the day of the dramatic announcement by Prime Minister Narendra Modi to immediately phase out Rs 500 and Rs 1,000 notes, Reserve Bank of India (RBI) governor Urjit Patel said the move would put 23.2 billion banknotes out of circulation but would not affect liquidity in financial markets.


Soon after Modi’s address to the nation, Patel addressed a press conference with deputy governor R Gandhi and the government’s Economic Affairs Secretary Shaktikanta Das to explain the move and soothe the nerves of common people as well as investors.


Anticipating panic and rush at bank counters, Das announced that banks will open additional counters and work extra hours beginning Thursday to help people exchange the invalid Rs 500 and Rs 1,000 notes.


Das admitted the move would cause some initial discomfort to the masses. “We expect initial inconvenience of 15-20 days to the general public. By that time, the new Rs 500 and Rs 2,000 notes would have been properly circulated into the system.


Das said the new notes would be officially launched and initiated into circulation from November 10. He added the flow of the new denomination notes of Rs 2,000 would be regulated and closely monitored by RBI. He also said a new high-security Rs 1,000 note will be re-introduced at a later date.


“RBI and the government have set up control rooms in Mumbai and Delhi to avoid any crisis,” Das said.


Gandhi said 16.5 billion Rs 500 notes and 6.7 billion Rs 1,000 notes would go out of circulation.


Banks will remain shut on Wednesday to allow stocking of smaller currency notes and the public will be allowed to tender their now-invalid Rs 500 and Rs 1,000 from November 10. They can deposit any amount of the invalid currency in their bank accounts till December 30 and also exchange them for lower banknotes at special counters at banks and post offices till November 24, but with a limit of Rs 4,000 a day, Das said.


Banks will, however, report any unusual transaction to the Financial Intelligence Unit and tax authorities for scrutiny, he added.


Patel said the central bank had ramped up production of the new higher security currency notes of Rs 500 and Rs 2,000, which will replace the notes being taken out of circulation.


He linked the government decision to use high-denomination currency notes for terrorism financing and also for holding black money.


While overall currency circulation had increased by 40 per cent during 2011-2016, the circulation of Rs 500 notes had gone up by 76 per cent and that of Rs 1,000 by 109 per cent, Patel added.


The government imposed strict cash withdrawal limits – Rs 2,000 from ATM and Rs 10,000 from bank account in a day and Rs 20,000 in a week – Patel said there would be no impact on liquidity in the markets including financial markets. “The cash withdrawal limits will be relaxed gradually as small-currency denomination notes are adequately stocked with banks and ATMs and new currency notes come into wide circulation,” Das said.

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