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Why the New Rs 500 Note is Missing from Your Pocket

Nov 29, 2016


Yesterday, the Reserve Bank of India, put out an interesting set of numbers. Between November 10, 2016 and November 27, 2016, the banks reported deposits of Rs 8,11,033 crore. Over and above this, Rs 33,948 crore of exchange of notes was carried out.

The deposits and exchange became necessary in the aftermath of the Narendra Modi government deciding to demonetise notes of Rs 500 and Rs 1,000, respectively. People have time till December 30, 2016, to deposit these demonetised notes into their bank accounts or their post office accounts. Earlier a certain amount of money could also be exchanged for new notes or notes which continue to be legal tender, but that has since been stopped.

Data from the Reserve Bank of India(RBI) shows that in 2015-2016 the total amount of paper notes in circulation amounted to Rs 16.4 lakh crore. Of this, the high denomination notes of Rs 500 and Rs 1,000 amounted to Rs 14.2 lakh crore. The Rs 500 notes amounted to Rs 7.9 lakh crore whereas Rs 1,000 notes amounted to Rs 6.3 lakh crore.

Between March 2016 and November 2016, the number of Rs 500 and Rs 1,000 notes would have gone up. Using "econometric model factoring in inter alia, real GDP growth prospects, rate of inflation and denomination-wise disposal rate of soiled notes," the RBI places orders for new notes every year. But given that we don't have exact numbers for the number of Rs 500 and Rs 1,000 notes printed between April 2016 and November 8, 2016, when these notes were demonetised, it is best to stick to the March end numbers.

Hence, Rs 500 and Rs 1,000 notes, forming 86 per cent of the total currency by value have been demonetised. Against the Rs 14.2 lakh crore worth notes that were demonetised, Rs 2,16,617 crore has made it back into the financial system between November 10, 2016 and November 27, 2016. People have withdrawn this money from their bank accounts as well as ATMs.

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What this means that withdrawals of Rs 2,16,617 crore from banks and ATMs have replaced the Rs 14.2 lakh crore of currency that has been rendered useless due to demonetisation. Of course, some portion of the currency that has been demonetised may have been hoarded in the form of black money.

The estimates of this black money in the form of cash that I have seen, vary anywhere from 6-20 per cent. Hence, even at the upper end of 20 per cent, more than Rs 11 lakh crore of currency (Rs 11.36 lakh crore to be very precise. Rs 14.2 lakh crore minus 20 per cent of Rs 14.2 lakh crore) was out there in the economy, helping people carry out transactions.

Hence, around 19.1 per cent, or a little under one fifth, of the demonetised currency which was in circulation, has been replaced. This best explains why transactions across markets in the country have collapsed. People just don't have enough currency going around.

It is easy to ask that why are they not moving towards wallets and netbanking. The point is that more than 80 per cent of the transactions in India by value are still carried in cash and that number cannot disappear overnight. This is an economic reality and needs to be taken into account in the political decision making process.

Assurances have been made about banks having enough new notes, both by politicians as well as the RBI. But that as we all know by now is really not true. The reason for that is straightforward. There aren't enough new Rs 500 notes going around simply because they haven't been printed. Some basic maths tells us that it will take at least another five to six months to print enough new Rs 500 notes and get them out there.

I had first discussed this issue in the November 25, 2016, edition of The Vivek Kaul Letter. But given the importance of this issue, the whole point is worth repeating here.

The question is why is the rate of currency replacement been so slow? The simple explanation for this lies in the fact that the government hasn't printed enough new notes to replace the old ones. There is only so much printing capacity going around at the printing presses of the government.

In total, around 1571 crore 500 rupee notes have become useless due to the demonetisation. Media reports suggest that the capacity of the government is to churn out around 300 crore notes per month. It is interesting to see how they have arrived at this number. In the last three years, the printing presses have supplied around 2200 crore notes a year, on an average. This number can be arrived at by looking at data in the RBI annual report.

A Mint newsreport points out that the total capacity of the printing presses is around 2400 crore notes per year. This is achieved by running two shifts. Adding a third shift can increase production by 50 per cent to 3600 crore notes per year. This essentially means a production of 300 crore notes per month.

What if we work with the supply number of 2200 notes per year? A third shift would lead to a jump of 50 per cent to 3300 crore notes per year. This would mean a production of 275 crore notes per month.

To get back to the point, around 1571 crore 500 rupee notes need to be exchanged. At 300 crore notes per month, this will take around 5.2 months to print, the new Rs 500 notes to replace the old ones. At 275 crore per month, it will take around 5.7 months.

So, just to replace Rs 500 notes can take a period of up to five months. Over and above this, there is the Rs 1,000 note that also needs to be replaced. In total, around 633 crore, 1000 rupee notes have become useless due to the demonetisation.

Assuming the new Rs 2,000 notes directly replace the Rs 1,000 note, then that would mean printing 316.5 crore new notes of Rs 2,000 (633 crore divided by 2). At the rate of 275 crore or 300 crore notes a month, this would mean a little over a month. If all the currency is printed, it will take a little over six months to print it.

Also, we can clearly see that the problem is with the Rs 500 note and not the Rs 2,000 note. Further, media reports suggest that most of Rs 2,000 notes that need to be printed have already been printed. There are a reasonable number of Rs 2,000 notes going around but they are of no use because nobody has enough change to return. They become useful only if a purchase of more than Rs 1,500 is to be made. Only then is it possible to get change from the merchants.

Of course, all this currency may not have to be printed given that all of it may not make it the banks, given that some of it is black money held in the form of cash. And some people may prefer letting their money become useless pieces of paper than generate an audit trail for the bank. That part of the detail will come clear only after December 30, 2016, the last date for depositing old notes to banks.

Current assumptions on black money held in the form of notes are in the range of 6-20 per cent. If, the total amount of black money held in the form notes is 20 per cent, then at least one-fifth of the demonetised notes will not make it to the banks. This would mean around a month less of printing new notes.

This one month less of printing new notes is nullified by the fact that we are considering Rs 500 notes in existence only until March 31, 2016. In 2016-2017, the RBI had asked the printing presses to print 572.5 crore of old Rs 500 notes to be printed, during the course of the year.

Assuming that half of the lot has already been printed, it would mean that close to 300 crore old Rs 500 notes would have been printed during the course of this financial year. These notes are over and above the 1,571 crore Rs 500 notes in existence as on March 31, 2016. They will also have to be replaced by the new Rs 500 notes and this would mean an extra one month of work, given the printing capacity of 300 crore notes per month. This would in effect neutralise the impact of around 20 per cent of the old Rs 500 notes not making it back to banks or post offices.

Taking these factors into account, it is likely to take at least five months for the situation to get back to normal, when there will be enough new notes going around in the financial system. And this with the assumption that all Rs 1,000 notes are replaced by Rs 2,000 notes.

If that is not the case, and Rs 500 notes also replace Rs 1,000 notes, then it will take even longer. Of course, all this comes with the assumption that during this period the low denomination notes of Rs 10, Rs 50 and Rs 100 are not printed at all. I don't know how feasible that is.

Also, we are assuming here that the government printing presses are working full steam here. Now that as well know is an unrealistic assumption. A report in the Quint points out that only 1 crore Rs 500 notes have been printed up until now. That is less than 0.1 per cent of the total number of Rs 500 notes that need to be printed. Further, I don't know whether the government printing presses are in a positon to run a third shift.

Other than printing the new notes, they should also reach the different parts of the country, quickly enough.

To cut a long story short, this mess will take some time to sort out.

Vivek Kaul is the Editor of the Diary and The Vivek Kaul Letter. Vivek is a writer who has worked at senior positions with the Daily News and Analysis (DNA) and The Economic Times, in the past. He is the author of the Easy Money trilogy. The latest book in the trilogy Easy Money: The Greatest Ponzi Scheme Ever and How It Is Set to Destroy the Global Financial System was published in March 2015. The books were bestsellers on Amazon. His writing has also appeared in The Times of India, The Hindu, The Hindu Business Line, Business World, Business Today, India Today, Business Standard, Forbes India, Deccan Chronicle, The Asian Age, Mutual Fund Insight, Wealth Insight, Swarajya, Bangalore Mirror among others.

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22 Responses to "Why the New Rs 500 Note is Missing from Your Pocket"


Dec 2, 2016

In this article and in general media and press, the major assumption is that the entire 14.6 lakh crores of currency must be replaced in addition to the other currency of 100s, 50s, 20s, 10s and coins.

If we just take 14.6 lakh crores and distribute it equally across 125 crore population it works out to Rs. 11360/- per head and for a family of 4, it means Rs.56800/- on a static basis without taking into account any velocity of money. This excludes the other 14%, which let's ignore for a moment. Doesn't it sound to be a lot of money to transact on cash basis? This basic premise is not questioned by many except a few.

Let us look at it from a couple of more angles. 98% of transactions in India are cash based. Should they be?

Currency in circulation is about 12% of GDP. Should it be?

What is the cost of printing, transporting, storing, replacing currency? One study put it at 1.5% of GDP. Should it be?

Like (1)


Dec 1, 2016

Dear Sirs,

i am a retired lecturer from the private sector - i get a pension of 761 INR every month

the demonetisation did not effect me much . on novemeber 9 th i had 8 500 rupee notes the medical shops
and the vegetable vendors have given me relief to change them - my diabetologist has accepted a note for two months - ie for december fee also

an Andhra bank branch ATM near my home has been regularily putting 100 rupee notes and dispensing 2000 every day against a debit card - for six times i could make my spouse stand in queue for an hour and could gather 12000 for the month of December

some TV news channels - media moguls are making the reports more apprehensive more fearful - which is not true to certain common men like me who have limited expenses to look into for every month - WHICH IS NOT SO ALARMING AT ALL and moreover, i have stated digital transactions through my debit card now - i am adopting

As my beloved columnist of TOI Mr. Jug Suraiya says in his latest "Corrupt Climate " it is the attitude of Honesty or Dishonesty that matters - is dishonesty in our DNA or a socio-cultural outcome ? he asks

Men may come and men may go ;
sorry Morarjis or Modis may come and go corruption or black money or for that matter any dishonest act may go on forever and people will devise new ways to cir-cum-navigate the issues - or find new loop holes


FINALLY what i want to say is the picture is not altogether so dismal

BUT I AM AN AAM ADDMI a common man - once i have read some where that ALL MEN ARE EQUAL BUT SOME MEN ARE MORE EQUAL
AND AGAIN the dilemma of FIRST AMONG EQUALS arises

i am in lowest level of economy in the hierarchy and it has not effected me adversely



m n sarma

Like (1)

E Peris

Nov 30, 2016

What a mass mess.

Like (1)


Nov 30, 2016

I am an ardent reader of your articles. You are one of those rare writers who articulates the problem really well and at the same time backs it up with sound statistics.

However, on this occasion, I find your article flawed and biased to some extent, since the core premise of this article appears to be 'govt. will definitely need to reprint and replace all demonetized notes'.
If all the notes are reprinted and back in circulation, the economy will return back to being 80% cash based.
Rendering no one the wiser!

I will be very happy to read your creative suggestions (data backed) in terms of ways to overcome the present hurdles and make demonetization achieve its desired objectives.
That would be more prudent and constructive since we can confidently assume that the govt will definitely NOT roll back demonetization.


Like (1)

Sunil Godse

Nov 30, 2016

Sir, Here is a way I look at it. Assume that we have 25 crore families, every day a family does a transaction Rs. 2000/- in cash. The person who receives this cash, in turn gives it out to other person (i.e. brings it back in circulation) after 10 days.

So, this means total cash requirement for our country will be 5 lakh crore. (25 * 2000 * 10: 25 crore family, 2000 circulation/per day, 10 days of lag before it is re-circualted. This figure of Rs. 5 lakhs is on a higher side. This is because it assumes every family transacts Rs. 60,000 per month. Most of the poor people will be much below this threshold of Rs. 60,000/- and well offs will be using electronic mode.

So, it tell me that lot of people put the money just at home (black + habit of filling up trunks). If Govt. brings velocity to money (with ads, etc.), encourages cash less then pain point will go away much early.

At the time of need, people have changed their behavior, it will happen this time too.

Like (1)


Nov 29, 2016


I would like to give a different spin. Knowing the poverty levels in country 60 %population will be using minimum number of 500 rs notes. Balance. 40 %might be using majority share of 500 notes. If they say switch over to additional 50 of transactions to electronics money the picture may not be as dismal as you have painted.


Like (1)

V V Kulkarni

Nov 29, 2016

Dear Sir,
The arithmetically we can arrive at the projected months to reprint currency. The equation is complex, when the parameters of printing currency are unknown. The algebraic equation is turning into probability.
As a citizen, we need to switch over to plastic money in the urban area, so the pressure on printing requirements can be normalized and instant requirement to replace 86% of cash currency can be reduced.
But, what can be scale to measure the reduction in demand is beyond my capacity.

Like (1)


Nov 29, 2016

I broadly agree with your argument that it will take couple of months to replace the demonetised currency notes.There is a silver lining in dark clouds. As stock of currency notes come down the velocity of money i.e. the rate of circulation of currency notes is likely to increase.This is likely to provide some relief to people.

Like (1)


Nov 29, 2016

I have made 4 comments the last week, NONE have appeared.

Let me disagree with this ARTICLE too...
- The fundamental premise is that ALL notes currently in circulation need to be replaced.
THIS IS VERY FLAWED... My back of the envelope estimate is that JUST about a THIRD of
the currency needs to be in the system... and that SHOULD be possible by DECEMBER 2016 or
mid Jan at the latest.
be THROTTLED by 50% in any case in the long run.
- It will certainly help if there are MORE number of 500 notes certainly.
- You are also not considering the RE-INTRODUCTION of soiled 100 notes
- The velocity of money will become faster, PEOPLE should not START generating fresh black money, and hording notes. This is ensured by the limiting withdrawal.

Also note, that none of the banks are RUNNING out of notes for withdrawal...

I am sorry to say, but I am finding the usual depth is missing...

Like (1)


Nov 29, 2016

Lots of statistics in there. I live in the textile city of tamilndu-coimbatore.
I have been going around various parts of the city plus the neighbouring districts of Erode and Tirupur. Let me state this-life has not come to a stop. Small and medium retailers have quickly adapted to the new situation-some of small retailers have opened customer accounts and are giving credit to accommodate payment by a higher denomination note. The medium and larger retailers are taking into the new payment mechanism.
This is a structural change like the GST which bring a large portions of the so called informal economy into the official economy.
My small question to our so called oposistion leaders-why should a rent of say Rs. 7000-Rs.10000 be paid in cash and why should the landlord not file a income tax return for his rental income,is this person the landlord a common man who refuses to come into the system be protected and defended.

P. S- will somebody please enlighten our members of parliament that write off by bank does not mean non-collection.

Like (3)
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