Demonetisation at Ten: What the Currency Data Shows

Why in News?

8 November 2026 marked ten years since the 2016 withdrawal of legal tender status for the old 500- and 1,000-rupee notes, as RBI data show cash still growing beside digital payments.

• Banknotes in circulation stood at ₹41.24 lakh crore at end-March 2026, up 11.9% in value and 10.5% in volume during 2025-26 (RBI Annual Report, 29 May 2026).
• 500-rupee notes make up 85.5% of banknote value; by volume, the 500-rupee note leads, followed by the 10-rupee note.
• RBI’s household payment-behaviour survey of individuals and small retail sellers indicated a continued strong preference for using cash.
• Counterfeit 500-rupee notes detected in the banking system rose 20.5%, from 1,17,722 to 1,41,907 pieces in 2025-26.

• This is an anniversary peg, not a new policy step: the exam value lies in reading currency data correctly.
• The 2023 Constitution Bench ruling settled the legality of the 2016 notification, not whether its stated goals were met.

UPSC Relevance

Prelims Relevance

• Section 26(1) and 26(2), RBI Act, 1934: legal tender, and its withdrawal by Central Government notification on the RBI Central Board’s recommendation
• Specified Bank Notes (Cessation of Liabilities) Act, 2017
• Banknotes in circulation vs currency in circulation vs currency with the public
• Vivek Narayan Sharma v Union of India (2023): five-judge bench, 4:1 majority
• Fake Indian Currency Notes (FICN) data in the RBI Annual Report
• e₹ (retail CBDC) in circulation

Mains Relevance

GS Paper 3

• Money supply, currency management and the RBI’s role
• Cash demand, digital payments and the informal economy

GS Paper 2

• Delegated legislation and judicial review of economic policy
• Consultation between the Union government and the RBI

Essay

• Cash, trust and the digital economy: why habits change slower than technology

Background and Context

Reading the currency measures

Headlines mix different RBI measures, and the gap between them is where most errors start.

• Banknotes in circulation: notes only, reported for end-March in the RBI Annual Report; the 2026 headline figure above is this measure.
• Currency in circulation (CIC): notes plus coins, published weekly in the RBI Weekly Statistical Supplement, so it always exceeds the banknote figure.
• Currency with the public: CIC minus cash on hand with banks; it is the cash component of money supply measures such as M1 and M3.
• Currency-to-GDP ratio: cash relative to nominal GDP; it can fall because the economy grows faster, not only because people switch to digital modes.
• Counterfeit counts are detections in the banking system and exclude police seizures, so a rise can reflect sharper detection as well as more fakes.

Why cash and UPI grow together

Digital payments replace cash for paying, but not necessarily for holding.

• Medium of exchange vs store of value: UPI substitutes cash at the point of payment, while households can still hold notes as a precautionary reserve.
• Nominal growth: cash demand tracks nominal GDP, so a rising rupee stock in a growing economy is expected and does not by itself prove a policy failure.
• Behaviour, not only access: RBI’s survey finding is a demand-side signal that cash persists even where digital payments are available.
• e₹ moved the other way: the retail central bank digital currency in circulation fell during 2025-26, so a new instrument does not automatically displace notes.

What the 2016 exercise did

The 2016 exercise worked through an executive notification, then needed a later Act to close the old notes’ legal tail.

• On 8 November 2016, a notification under Section 26(2), RBI Act, 1934 declared the old 500- and 1,000-rupee notes, called specified bank notes, no longer legal tender.
• The RBI Annual Report 2017-18 put these notes at ₹15.42 lakh crore on 8 November 2016; 99.3% of that value returned to the RBI.
• The Specified Bank Notes (Cessation of Liabilities) Act, 2017 ended the RBI’s liability on the old notes, with grace periods for citizens who were abroad.
• Exam trap: the 2023 withdrawal of 2,000-rupee notes began through an RBI press release under its clean note policy, and those notes remain legal tender.

What the 2023 judgment settled

The Supreme Court answered a question of power and procedure; it did not grade the economic results.

• In Vivek Narayan Sharma v Union of India (2 January 2023), a five-judge Constitution Bench upheld the 2016 notification by a 4:1 majority.
• Majority (Justice B.R. Gavai): “any series” in Section 26(2) includes all series, and the Central Board’s recommendation is an inbuilt safeguard against excessive delegation.
• The majority found about six months of Union-RBI consultation adequate and held the measure not disproportionate to its stated aims.
• Dissent (Justice B.V. Nagarathna): withdrawing all series needed a parliamentary law or an ordinance, the legislative route used in 1946 and 1978.
• She also held that the RBI had not independently applied its mind before recommending the 2016 exercise.

Way Forward

Better evidence for currency policy

• Release fuller results of RBI’s payment-behaviour survey so researchers can study why households keep preferring cash.
• Pair the new banknote security features, which RBI expected to roll out in phases from mid-2026, with close tracking of 500-rupee counterfeit detections.
• Clarify the scope of Section 26(2) in law, or use the legislative or ordinance route, before any future withdrawal of whole denominations.
• Build an independent ex-post evaluation into large currency decisions, since no official assessment of the 2016 outcomes exists.

Conclusion

• Split any demonetisation answer into two layers: legality, which the 2023 judgment settled, and outcomes on black money or terror financing, which no official assessment has measured.
• Name the measure before citing a number, then explain rising cash beside UPI through the gap between paying with money and holding it.
• For Prelims, keep the legal chain straight: Section 26(2) notification in 2016, the Cessation of Liabilities Act in 2017, and the 4:1 judgment in 2023.

UPSC Practice Questions

Prelims MCQ 1

With reference to demonetisation in India, consider the following statements:

1. Under Section 26(2) of the RBI Act, 1934, the Central Government may declare a series of bank notes to cease to be legal tender on the recommendation of the RBI Central Board.
2. The 2016 demonetisation was carried out through an Act of Parliament.
3. In Vivek Narayan Sharma v Union of India (2023), the Supreme Court upheld the 2016 notification by a 4:1 majority.

How many of the above statements are correct?

(a) Only one (b) Only two (c) All three (d) None

Answer: (b) Only two

Explanation:

Statements 1 and 3 are correct. The 2016 exercise used an executive notification under Section 26(2); the 1946 and 1978 demonetisations used the legislative route.

Prelims MCQ 2

In RBI’s monetary data, ‘currency with the public’ is best described as:

(a) Banknotes supplied by the printing presses during a year (b) Currency in circulation minus cash on hand with banks (c) Banknotes in circulation minus counterfeit notes detected (d) Currency in circulation plus demand deposits with banks

Answer: (b) Currency in circulation minus cash on hand with banks

Explanation:

Currency with the public excludes cash held by banks. Adding demand deposits to it gives narrow money (M1), so option (d) is a different aggregate.

UPSC Mains Questions

1. Ten years after demonetisation, both cash in circulation and digital payments have grown in India. Explain why these trends can coexist and what they imply for payments policy. (250 words)
2. Examine the majority and dissenting opinions in Vivek Narayan Sharma v Union of India (2023) on the use of Section 26(2) of the RBI Act, 1934. What do they reveal about executive power in economic policy? (250 words)

Sources: Reserve Bank of India, Annual Report 2025-26 (Ch. VIII, Currency Management) and The News Minute.

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