Currency notes of Rs 500 and Rs 1000 issued prior to 2005 will not be in circulation after March 31, 2014.
Reserve Bank of India (RBI) Governor Raghuram Rajan said that these notes can be exchanged only at commercial banks from April 1.
He said that the action was not intended to check black money but to curb counterfeiting of notes.
It is easy to distinguish currency notes issued before 2005 since they do not contain the year of printing on the reverse.
Allaying public fears, Mr Rajan said that notes would remain legal tender.
“This is not a measure of demonetisation but mere culmination of Finance Ministry’s long-pending request to replace the ‘less secure old currency’ with newer notes that have better security features.
“People are making different interpretations; the move has nothing to do with the coming elections. We are printing new notes,” Mr Rajan said, speaking at the Eighth Annual R N Kao Memorial Lecture organised by the Research & Analysis Wing in Delhi on January 23, 2014.
Describing inflation as a ‘destructive disease,’ he said that there can be no trade-off with growth and that prices must be brought down.
“Industrialists complain about high interest rate (raised recently to 8%). We do not have a choice but to keep interest at high rate because inflation is high at 8%” he said.
While industrialists want interest rate to stay at about 5%, common people would like saving interest to be 10%.
“The mismatch between industrialists’ demand and accounts holders is because of inflation,” Mr Rajan said.
According to RBI sources, another near-term hike was unlikely if inflation eased to a more comfortable level.
India’s main gauge of inflation, the Wholesale Price Index (WPI), rose 6.16% in December 2013, while the Consumer Prices Index (CPI), seen as the key gauge of inflation across most other countries, rose at an annual rate of 9.87%.
“Inflation, excluding food and fuel, has also been high, especially in respect of services, indicative of wage pressures and other second-round effects,” the sources said.