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While the withdrawal of high denomination bank notes in India has made the world’s headlines, the scenario is not so unusual according to a local treasury expert.
There have been long queues outside banks in India, and ATMs in Delhi and Mumbai reportedly ran out of money, after Indian Prime Minister Narendra Modi made the surprise announcement that 500 and 1,000 rupee notes would be demonetised.
Iain MacKenzie, Head of Treasury at Canaccord Genuity Wealth Management, said that other countries had made, or were considering, similar moves. However, the difference in India was the relatively low value of the notes being withdrawn. 500 rupees is worth only around £6, although this is a significant amount relative to the average monthly income in India.
“Indians have until 30 December to exchange their 500 and 1,000 rupee notes, yet strangely the Reserve Bank of India has plans to issue a new Rs. 500 note and a Rs. 2,000 note in the future,” Mr MacKenzie said.
The rationale in India is that the withdrawal of the notes will force those holding them to deposit them in banks and the State will be able to capture tax revenues that would otherwise have remained elusive.
Such moves have occurred in other countries – there are plans to withdraw the euro 500 note from issue in 2018, however the euro note will remain legal tender unlike the rupee.
The withdrawal of £50, US$100 and 1,000 Swiss franc notes has been mooted but this has not materialised, while Canadian and Singaporean 1,000 dollar notes were removed in 2000.
And the rise of electronic and digital transactions is also leading to a gradual decline in the use of bank notes but Mr MacKenzie doesn’t see them disappearing in the near future.
“With the rise of negative interest rates on deposits being imposed by many central banks, more cash is being held in insured, secure premises, the cost of which - particularly in Switzerland - is less than the negative rate incurred.
“A more radical approach, as explored by Andy Haldane, Bank of England Chief Economist in a speech in 2015, would be the abolition of all cash. Money would be purely in electronic form and could be taxed easily or have negative rates applied in totality.
“As we become more enmeshed in the internet of things the role of paper money has declined. However it would be a brave soul who would forecast its natural demise anytime soon,” he said.
