The reasons behind the huge jump in high denomination notes
3 min read 02 Jun 2022, 01:49 PM ISTThere has been an unusual expansion in currency in circulation due to pandemic-stricken tendency to hold cash. To be able to tackle a medical emergency which leads to financial emergency, people have been hoarding cash at home
PremiumThe number of high denomination notes in the Indian financial system has been growing at an astonishing pace. As per the recently published annual report of the Reserve Bank of India (RBI), the total number of ₹500 notes and ₹2,000 notes as of March 2022 stood at 47.69 billion pieces. This implies a growth of more than 26% per year in the four-year period between end March 2018 and end March 2022. If we look at the four-year period ended March 2016, the high denomination notes of ₹500 and ₹1,000, had grown at the rate of 12.6% per year. The rate of growth has more than doubled.
In fact, high denomination notes formed around 24.4% of the total number of notes as of March 2016, before demonetization happened. This went up to 36.5% as of March 2022.
The central government demonetized high denomination notes of ₹500 and ₹1,000 in November 2016 and replaced them with new high denomination notes of ₹500 and ₹2,000. In fact, in a press release accompanying the announcement of demonetization it was said that high denomination notes are known to facilitate generation of black money, making demonetization necessary.
The logic behind this is simple. It takes more space to store black wealth in notes of smaller denominations than it takes to store it in notes of higher denominations. If the government’s logic behind the demonetization of 2016 is to be believed then it is easier to store black wealth now than it was six years back, given that there are more high denomination notes going around.
So, what are the reasons behind the rise of high denomination notes. First, as the economy grows, the number of high denomination notes in the economy grow as well. Second, inflation pushes up prices and leads to people having to use notes of higher denominations to buy things.
Third, the growth in high denomination notes in 2018-19 was also due to people trying to go back to maintaining cash levels they used to, in the years before demonetization. The total number of high denomination notes as of March 2016 had stood at 22.03 billion pieces. It was at 18.83 billion pieces as of March 2018 and jumped to 24.81 billion pieces as of March 2019.
Fourth, in the aftermath of the covid pandemic there has been a dash for cash.
As the RBI had said in its annual report for 2020-21, there has been an “unusual expansion in currency in circulation due to pandemic-stricken tendency to hold cash". In order to be able to meet a medical emergency which leads to a financial emergency people have been hoarding cash at home. While this was truer for 2020-21 than for 2021-22, it remains an important factor nonetheless. People feel psychologically safer by having more cash with them at home than was the case in the past.
Fifth, as economist Ajit Ranade put it in a recent column on the Mint Views page: “Companies that handle cash management say that cash usage is growing at a staggering pace, especially in rural areas."
And finally, there is a technical reason. Post demonetisation, the government introduced ₹500 and ₹2,000 notes in order to replace, ₹500 and ₹1,000 notes. This went against the very logic of higher denomination notes making it easy to store black wealth. A late realisation happened on this front and the number of ₹2,000 notes in the economy has been going down every year.
The number of ₹2,000 notes stood at 3.36 billion pieces as of March 2018, falling to 2.14 billion pieces as of March 2022. These notes are being replaced by a higher issuance of ₹500 notes. It takes four notes of ₹500 to replace one ₹2,000 note. So, this also explains the increase in high denomination notes.
All these reasons together explain why high denomination notes have gone up at such a massive pace.
(Vivek Kaul is the author of Bad Money.)
