Banks will use indelible ink to ensure that people only change old notes for new ones once under Prime Minister Narendra Modi's scheme to fight "black money", resorting to a tactic used to prevent multiple voting in elections.
The step comes a week after Modi ordered the withdrawal of large denomination banknotes from circulation, in a shock "demonetisation" drive to fight tax evasion, corruption and forgery.
The government only gave people a few hours notice before the old Rs 500 and Rs 1,000 banknotes - which accounted for 86 percent of cash in circulation - were cancelled.
The sudden move has caused huge disruption to daily life, especially for poor people who live in the cash economy.
Secretary of Department of Economic Affairs Shaktikanta Das said the use of indelible ink - also used to stop multiple voting in Indian elections - would prevent "unscrupulous persons" from sending people from one bank branch to the next to exchange old notes.
Individuals are only allowed to swap Rs 4,500 rupees once.
"You find the same people coming back again and again," Das told a briefing, saying huge queues were preventing honest people from getting the cash they need.
Campaigning to win power in 2014, Modi had pledged to flush out corruption by forcing people to bring their hidden money back into the system.
And with an important state election just months away, he is again campaigning to justify the demonetisation drive.
"After demonetisation, the poor are enjoying a sound sleep while rich are running from pillar to post to buy sleeping pills," he told a rally on Monday in Uttar Pradesh, which goes to the polls next spring.
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