India Fights Counterfeit Currency by Taking High Denomination Notes Out of Circulation

By:
Dominic G. Diongson
Published Date:
Nov 11, 2016

Delhi, India on October 30, 2016 by Dominic G. Diongson
Indian Prime Minister Narendra Modi has taken an unprecedented step in his pledge to fight corruption by eliminating its two highest denomination currency notes and issuing new ones.

The government’s announcement late on Tuesday to immediately remove the 500 and 1000 rupee notes (valued at $7.40 and $14.80, respectively) was met with a frenzy, as Indians scrambled to do away with their higher-tiered currency in whatever way they could. Bloomberg reported that the two notes accounted for 86 percent of total currency in circulation in the nation, where 98 percent of consumer payments are still conducted in cash. Other media reported of banks running out of cash, with police being called in to maintain order, and of disruptions to businesses.

The country’s central bank, the Reserve Bank of India, said on its website that the measure was undertaken to combat counterfeit currency, which would eliminate money that is unaccounted for and circulating in the black market, and curb funding of terrorist activities with fake notes. Bloomberg reported that about a quarter of India’s $2 trillion economy is unaccounted for, and this move could help boost online transactions and improve transparency.

As of Tuesday the two notes can no longer be used for transactions, but people can deposit or exchange the notes at banks until Dec. 30. The central bank will soon issue new 500 and 2000 rupee notes.

There has been a push in developed economies to halt the use of high denomination currencies. In February, former U.S. Treasury secretary Larry Summers posted an opinion on the Washington Post calling for the elimination of high denomination notes like the 500 euro (valued at ($543) and the $100 bill in an effort to combat corruption and illegal activity. In May the European Central Bank discontinued production of the 500 euro note, citing concerns of its use in illicit activity, but it remained a legal tender currency for an indefinite period of time.

The Fed released a working paper in 2012 showing that demand worldwide for U.S. currencies, particularly the $100 note, has increased significantly, from the fall of the Berlin Wall in 1989 to 2011. During that period, half or a little more than half of U.S. currency circulated abroad, it reported. To combat counterfeiting the U.S. has released different issues of the $100 bill in the past few years.

As for low denomination notes, in 2013 the Fed released a staff working paper discussing the replacement of the $1 note with a coin on the premise that the coin would result in government savings. But the Fed said at the time that the note remained the more efficient instrument of payment method and should remain in circulation.

 

 

 

 

 

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