Indian prime minister Narendra Modi ordered the withdrawal of 500 and 1,000 rupee notes from circulation on Tuesday (November 8) in a shock announcement designed to tackle widespread corruption.
Modi said that while people could exchange their old notes for new bills at banks or post offices, or deposit them in their accounts, they would no longer be legal tender from midnight.
“To break the grip of corruption and black money, we have decided that the 500 and 1,000 rupee currency notes presently in use will no longer be legal tender from midnight tonight (November 8),” Modi said in a televised address to the nation.
“This means that these notes will not be acceptable for transaction from midnight onwards.”
The surprise step appears designed to bring billions of dollars worth of cash in unaccounted wealth into the mainstream economy, as well as hit the finances of Islamist militants who target India and are suspected of using fake 500 rupee notes to fund operations.
The government’s finance secretary said in a separate statement that there had been a disproportionate rise in the number of 500 and 1,000 rupee notes in circulation in the last five years.
The 500 and 1,000 notes, which are worth around £6 and £12 respectively at current exchange rates, are the largest bills in use in India.
Modi said that although the existing notes would be “worthless”, people would be able to exchange them for new bills at banks until December 30.
He said new 500 and 2,000 rupee denomination notes will be issued later by the Reserve Bank of India (RBI).
Hospitals and transport operators would continue to accept old 500 and 1,000 rupee notes for payment for the next 72 hours.
They would also be accepted at gas stations run by public sector oil companies, and at milk booths, crematoriums and burial grounds.
ATMs and banks would be closed on Wednesday and some ATMs would also be closed on Thursday.
While the use of debit and credit cards has increased in the last decade in India, many retailers still either insist on taking cash to evade tax or else ask for mark-ups to cushion the blow.
Finance secretary Shaktikant Das said the decision to pull the notes from circulation was “a very bold and powerful and a very decisive step to fight the menace of black money and the use of fake Indian currency notes”.
He revealed that the new 500 rupee note would bear the image of Delhi’s iconic Red Fort while the new pink 2,000 rupee note would have India’s Mars orbiter Mangalyaan on it.
Das also appealed to citizens not to allow themselves to be used by others to exchange illegal cash.
RBI chief Urjit Patel told reporters at a press conference in New Delhi that the central bank has been concerned with the growing menace of fake Indian currency notes which has been increasing in numbers.
Modi’s ruling Bharatiya Janata Party came into power in 2014 promising to bring billions of dollars of black market money into the regular financial system. Critics said it had failed to deliver on that promise.
Tuesday’s announcement comes just over a month after the government raised nearly $10 billion (£8bn) through a tax amnesty for Indians to declare hidden income and assets.
A report by Washington-based think-tank Global Financial Integrity estimated that India lost $344bn (£278bn) in illicit fund outflows between 2002 and 2011.
Modi also said militants operating against India were using fake versions of the 500 rupee note.
“Terrorism is a frightening thing … But have you ever thought about how these terrorists get their money? Enemies from across the border have run their operations using fake currency notes. This has been going on for years,” Modi said.
Some officials and experts said Tuesday’s move was the biggest in decades aimed at fighting graft.
“It is like a surgical strike on black money,” said revenue secretary Hasmukh Adhia. (AFP, Reuters)