RBI's Currency Exchange - Impacts

The Reserve Bank of India has announced that starting it will withdraw all notes that were printed before 2005.

Starting 1^st April 2014, the all banks will exchange old notes with new ones. One has to present all old notes to banks and they will be provided with new ones. Starting July 2014, anyone exchanging more than 10 notes of Rs 500 or Rs 1000 will have to present their ID proof.

How to identify which notes were printed before 2005?

All notes printed before 2005 did not have the year of printing on them. Starting 2005, all notes have the year printed on the back side at the bottom.

The move is aimed at reducing fake notes from circulation. However, it was clarified by RBI Governor R Rajan that the pre-2005 notes will continue to be legal tender. This has created further confusion among people as to whether they should actually replace the notes or not.

Impact of Currency Recall

The currency recall announcement has a huge impact as this would capture the money inflows and help flush out counterfeit notes out of the system. This is because since 2005, notes have added security features that make duplication difficult.

Since a huge portion of this is likely to be black money, there could be a spurt in cash spending as well – this could be in various avenues. People will either have to spend it or declare it as they would have to be cautious of the Income Tax department asking for the source of income.

On the other hand, a lot of money may also be converted into actual money with people depositing money into banks which was not done earlier. However, the existing laws already provide that deposits in excess of Rs 50,000 requires one to disclose their PAN. This could be a web which will catch the people and compel them to disclose their sums.

At the same time, black money with business tycoons and politicians may chase real assets ahead of the elections in May on fears that come April they'll face uncomfortable questions from the income tax department even though, theoretically, unlimited amounts of currency could be exchanged without disclosing the source of income.

Gold prices may increase: People will increase their spending on Gold as those who had parked cash as their savings will find this to be a good option. Similarly, real estate transactions will also be affected.
Agents who are in the business of exchanging notes will mushroom further and there is likely to be a spurt in people exchanging notes with banks.

Further, since the announcement has been made in January, there is likely to be enough transactions before the effective date (between January and April) and people have already started panicking with the announcement.

In 1977 when the notes of higher denomination were demonetised, they went to Nepal and has the same legal status and the intention of curbing black money was not achieved.