The five-thousand-rupee question

Ever wonder why we have a Rs5,000 note? If not, you should — because the note has a very interesting story to tell.

It was introduced in 2006, and accounted for the bulk of the increase in “currency in circulation” for the next few years. Those in favour of its publication argued that it simplifies cash movement. So every day, for example, large amounts of cash need to be flown from Karachi to other cities around the country to meet the cash requirements of the banks.

These requirements have a seasonality to them, meaning they increase in some months and go down in others year after year. So every time the wheat harvest comes in, cash requirements in the wheat-growing areas of southern Punjab and upper Sindh rise sharply as farmers cash their payments. Then, slowly, the money returns to the banking system as the cash is used to purchase inputs for the sowing of cotton. The system, therefore, sees a large movement of cash going out then coming back in as this cycle plays out.

The argument in favour of the high denomination note is that it helps in the execution of these cash operations, since if these transactions were done in Rs1,000 notes, it would entail five times the volume of cash and the sheer logistics and transport of such voluminous quantities of cash would be cumbersome.

Fair enough. Except there is a small problem: the Rs5,000 note is not used in these cash operations, and according to research done at the State Bank many years ago (and never released so I am going by details shared informally with me by those who saw the research), it does not even exhibit any seasonality in its circulation. The same research showed that once the note enters circulation, it rarely returns to the banking system.