Official Take: Why Rs 500 and Rs 1,000 notes were scrapped

Taking the nation by surprise, Prime Minister Narendra Modi on Tuesday night announced demonetisation of Rs 1000 and Rs 500 notes with effect from midnight, making these notes invalid in a major assault on black money, fake currency and corruption.

Later in the night, the finance ministry issued a note which said that the government and the RBI's move to take out Rs 500 and Rs 1,000 banknotes from circulation will help India towards cash-less economy where most transactions are done electronically and that can be tracked.

The note said: 'With a view to curbing financing of terrorism through the proceeds of Fake Indian Currency Notes and use of such funds for subversive activities such as espionage, smuggling of arms, drugs and other contrabands into India, and for eliminating black money which casts a long shadow of parallel economy on our real economy, it has been decided to cancel the legal tender character of the high denomination bank notes of Rs 500 and Rs 1000 denominations issued by RBI till now.'

'This will take effect from the expiry of November 8, 2016. FICN in circulation in these denominations are comparatively larger as compared to those in other denominations. For a common person, the fake notes look similar to genuine notes.'

'Use of FICN facilitates financing of terrorism and drug trafficking. Use of high denomination notes for storage of unaccounted wealth has been evident from cash recoveries made by law enforcement agencies from time to time.'

'High denomination notes are known to facilitate generation of black money. In this connection, it may be noted that while the total number of bank notes in circulation rose by 40% between 2011 and 2016, the increase in number of notes of Rs 500/- denomination was 76% and
for Rs 1,000/- denomination was 109% during this period. New Series bank notes of Rs 500/- and Rs 2,000/- denominations will be introduced for circulation from November 10, 2016.'

'Infusion of Rs 2,000/- bank notes will be monitored and regulated by RBI. Introduction of new series of banknotes which will be distinctly different from the current ones in terms of look, design, size and colour has been planned.'

Read the full statement issued by the finance ministry HERE