MUMBAI: Reserve Bank of India Governor Raghuram Rajan said the withdrawal of pre-2005 notes is to prevent counterfeiting and it is not intended to get at black money, tax evasion etc.
I am not saying those are good things. his is technical action, in order to withdraw notes which have fewer security features than new notes, Rajan said in a media briefing after announcement of third quarter monetary policy review.
It is an attempt to reduce the possibility of counterfeiting and give more reliable notes at the hands of the public, he said.
Barring a minor increase in gold prices, the Reserve Bank of India’s decision to withdraw currency notes printed before 2005 is unlikely to have any major impact on asset prices.
On the contrary, the move may help central bank to contain inflationary pressure in certain pockets of the economy, apart from weeding out counterfeit notes from the country’s currency chests, experts and economists told Businessworld.
"Of course we want to minimise any inconvenience (to the) public...so this process (of withdrawal) would be much smooth. This particular currency withdrawal is meant at something else," he added.
The RBI had also said the volume of such notes that were being withdrawn from circulation was not significant.
On whether the counterfeiter will now see new means, Rajan said, "the whole point about the security feature is that they are hard to counterfeit. We have no doubt we are in a constant race, we have to keep improving the security features and counterfeiters keeps trying to figure out how to do that."
Notes will continue to be withdrawn, he said, adding, it is a part of a technical process which will continue in the future also.
Swapping Old Notes With Gold
The RBI diktat has kind of triggered a panic situation among people holding liquid cash. People in possession of unaccounted cash are trying to convert their currencies by buying gold jewelry and bullion in small quantities. This has resulted in a marginal rise in gold prices in local markets. Consequent to this, gold prices have gone up by about Rs 700 to Rs 30,000 per ten grams in local gold markets.
“We’re seeing small cash trades being done in gold and bullion market. This, in a way, has jacked up gold prices a wee bit,” said Kumar Jain, vice-president of Shree Mumbai Jewellers Association.
“Volumes of such trades are very small though; bullion traders will not do large cash trades as they will find it difficult to bank (deposit in the bank) large cash deals in pre-2005 series,” Jain added.
Popular asset classes like real estate and commodities are not likely to be affected by the RBI decision. The biggest reason for this is the fact that sellers (of these asset classes) may not want to transact in pre-2005 currency series as they may find it difficult to convert these notes to new ones.
“You may see minor land deals happening… but no large-ticket real estate deals are likely to happen in the pre-2005 currency series,” said Anshuman Magazine, CMD, CBRE, a leading real estate consulting firm.
Will It Bring Down Inflation?
According to bankers, the process of swapping old notes for new ones could have larger implications on unaccounted currency in circulation. Though banks are required to freely exchange currencies, RBI norms make it mandatory for them to report large-ticket transactions. The move to withdraw old notes may indirectly reduce inflation, some experts believe.
“This is a good move by RBI… It will reduce incidence of counterfeit notes in the system. Also, the exclusion of pre-2005 notes from the system will bring down liquidity marginally; this may bring down inflationary tendencies in certain pockets,” said Mumbai-based independent investment advisor G Chokkalingam.
According to buyers of real assets could bargain for discounted prices if they are paying in new currency notes. This opportunity may only last for a few months, he said.
Political parties may have to “upfront” their poll-related spends to get rid of pre-2005 notes. They may start depleting their liquid cash reserves four – five months before the June 30 deadline.
Banks As Currency Distributor
A currency note swap of this magnitude will test the efficacy on banking channels in currency distribution. There are worries as to how smaller banks will meet large swap requirements. Not many Indian banks have the capacity to hold large cash stock on their premises.
“It’s going to be a nightmare from logistic point of view. Banks will have to estimate their cash stock requirements properly; this will have to be done more efficiently in rural areas where people save a lot in liquid cash,” said Madan Sabnavis, economist at CARE Ratings.
"I don’t see any major impact on the liquidity front. On the consumption side, we may see an increase in cash purchases,” Sabnavis added.
According to Sabnavis, the government will have to guard the Nepal border as Indian currency is accepted in that country. “The government should block the flow of old currency to Nepal. If old currency moves to Nepal, there’s a good chance, it may continue to be in circulation,” Sabnavis added.
I am not saying those are good things. his is technical action, in order to withdraw notes which have fewer security features than new notes, Rajan said in a media briefing after announcement of third quarter monetary policy review.
It is an attempt to reduce the possibility of counterfeiting and give more reliable notes at the hands of the public, he said.
Barring a minor increase in gold prices, the Reserve Bank of India’s decision to withdraw currency notes printed before 2005 is unlikely to have any major impact on asset prices.
On the contrary, the move may help central bank to contain inflationary pressure in certain pockets of the economy, apart from weeding out counterfeit notes from the country’s currency chests, experts and economists told Businessworld.
"Of course we want to minimise any inconvenience (to the) public...so this process (of withdrawal) would be much smooth. This particular currency withdrawal is meant at something else," he added.
The RBI had also said the volume of such notes that were being withdrawn from circulation was not significant.
On whether the counterfeiter will now see new means, Rajan said, "the whole point about the security feature is that they are hard to counterfeit. We have no doubt we are in a constant race, we have to keep improving the security features and counterfeiters keeps trying to figure out how to do that."Notes will continue to be withdrawn, he said, adding, it is a part of a technical process which will continue in the future also.
Swapping Old Notes With Gold
The RBI diktat has kind of triggered a panic situation among people holding liquid cash. People in possession of unaccounted cash are trying to convert their currencies by buying gold jewelry and bullion in small quantities. This has resulted in a marginal rise in gold prices in local markets. Consequent to this, gold prices have gone up by about Rs 700 to Rs 30,000 per ten grams in local gold markets.
“We’re seeing small cash trades being done in gold and bullion market. This, in a way, has jacked up gold prices a wee bit,” said Kumar Jain, vice-president of Shree Mumbai Jewellers Association.
“Volumes of such trades are very small though; bullion traders will not do large cash trades as they will find it difficult to bank (deposit in the bank) large cash deals in pre-2005 series,” Jain added.
Popular asset classes like real estate and commodities are not likely to be affected by the RBI decision. The biggest reason for this is the fact that sellers (of these asset classes) may not want to transact in pre-2005 currency series as they may find it difficult to convert these notes to new ones.
“You may see minor land deals happening… but no large-ticket real estate deals are likely to happen in the pre-2005 currency series,” said Anshuman Magazine, CMD, CBRE, a leading real estate consulting firm.
Will It Bring Down Inflation?
According to bankers, the process of swapping old notes for new ones could have larger implications on unaccounted currency in circulation. Though banks are required to freely exchange currencies, RBI norms make it mandatory for them to report large-ticket transactions. The move to withdraw old notes may indirectly reduce inflation, some experts believe.
“This is a good move by RBI… It will reduce incidence of counterfeit notes in the system. Also, the exclusion of pre-2005 notes from the system will bring down liquidity marginally; this may bring down inflationary tendencies in certain pockets,” said Mumbai-based independent investment advisor G Chokkalingam.
According to buyers of real assets could bargain for discounted prices if they are paying in new currency notes. This opportunity may only last for a few months, he said.
Political parties may have to “upfront” their poll-related spends to get rid of pre-2005 notes. They may start depleting their liquid cash reserves four – five months before the June 30 deadline.
Banks As Currency Distributor
A currency note swap of this magnitude will test the efficacy on banking channels in currency distribution. There are worries as to how smaller banks will meet large swap requirements. Not many Indian banks have the capacity to hold large cash stock on their premises.
“It’s going to be a nightmare from logistic point of view. Banks will have to estimate their cash stock requirements properly; this will have to be done more efficiently in rural areas where people save a lot in liquid cash,” said Madan Sabnavis, economist at CARE Ratings.
"I don’t see any major impact on the liquidity front. On the consumption side, we may see an increase in cash purchases,” Sabnavis added.
According to Sabnavis, the government will have to guard the Nepal border as Indian currency is accepted in that country. “The government should block the flow of old currency to Nepal. If old currency moves to Nepal, there’s a good chance, it may continue to be in circulation,” Sabnavis added.
