RBI: New in, Old out! - ED | The Youth Blog | ED | The Youth Blog RBI: New in, Old out! - ED | The Youth Blog
  • Check out our new reading mode

    RBI: New in, Old out!

    By

    January 29, 2014

    This article is written by Deepshikha Agarwal

    rbi2

    Money, defined as anything that is commonly accepted as a medium of exchange, is considered by most as the solution to all their problems (well most if not all). It buys us things we want, takes us to places we want to go to, fulfills our desires and so gives us a drive to work hard.

    Well money is however been too much in the news and is always an important topic of discussion and worry. After the rupee slide phenomenon, the news is that RBI, the apex body in the Indian Banking System, has decided to withdraw all currency issued prior to 2005. After April 1, although these notes will continue to be legal tender, it will be so only partly. Post March 2014, these will not be accepted in making transactions and will have to be exchanged in banks for the notes issued post 2005.

    The reasons given by the Governor, Raghuram Rajan are not yet clear but he claims security issues to be the main reason.  There have been different interpretations some of which say that it is related to demonetization or could be related to the general elections due in May 2014.

    However RBI officials have clearly specified that the only reason behind such a step is security issues, notes issued post 2005 have a better security feature and hence are more ‘effective’. This will help curb the fake money problem.  It is a step which is expected to unearth black money held in cash.

    However, this will also hit different sections of the society and different sectors in different ways. Most evidently hit would be the poorer and the illiterate sections of the society, more so in rural areas than in urban areas. Most of these people are not aware of the banking system and how it works. This is true particularly of the rural areas. Not many banks are available in the rural areas to add to the problem. Now, this might add to what is known as the “transaction cost” which will include costs like time, effort, cost of travelling to the banks to exchange money etc. ,  commonly known as the “shoe leather cost” in economics.

    rbi1

    Also being poor, who hold most of their money in the form of cash at their homes itself, an obvious fear is that of theft while they may have to commute to the banks.

    Shoe leather cost will be incurred by not only the poor but also by the middle income category. After all, for an employed middle income person, who barely has time for himself, this will only add to the stress !!

    Next come the corrupt. They will be hit the worse. All the money that they have hidden under their pillows for years, known as the ‘black money’, mostly to evade taxes, will now give them sleepless nights. This is what the RBI expects. A lot of black money will be converted into white money. Surely a good thing for the nation.

    Coming to real estate, it is being speculated that there will be a spurt in real estate deals. This will increase the prices in the real estate sector. The buying of gold and hence gold prices is also expected to be on the rise. People may use cash to buy realty or gold before the April 1 deadline to phase out pre-2005 notes. However, after the rupee slide, this increase in demand for gold may not really be the right thing to happen. India is already the largest importer of gold, and buying of more gold, although temporarily, could affect the exchange rate.

    RBI’s decision could be a good step which will reduce corruption relating to black money, increase security measures and phase out counterfeit money, but there is no doubt about the other unintended repercussions it will have.

     

    Views presented in the article are those of the author and not of ED.

    Liked reading this article? Subscribe to us.
    In Finance