On November 7, Govt advised RBI to consider note ban, got RBI nod the next day
A few days after receiving flak from Parliamentary panel, Reserve Bank of India’s report annulls government’s claim that it was RBI who took the decision to illegalise the 500 and 1000 rupee notes. However, it has agreed to government’s rationale behind demonetisation.
According to The Indian Express reports, RBI in a seven-page note submitted on December 22 to the Parliament’s Department Related Committee of Finance headed by Congress leader M Veerappa Moily said, “Government, on November 7, 2016, advised the Reserve Bank that to mitigate the triple problems of counterfeiting, terrorist financing and black money, the Central Board of the Reserve Bank may consider withdrawal of the legal tender status of the notes in high denominations of Rs 500 and Rs 1,000.”
“It was advised in that letter that cash has been a facilitator of black money,” the note went on to state, “elimination of black money will eliminate the long shadow of the ghost economy and will be positive for India’s growth outlook. They also observed that in the last five years, there has been an increase in circulation of Rs 500 and Rs 1,000 notes with an increasing incidence of counterfeiting of these notes.
There have been widespread reports of the usage of Fake Indian Currency Notes (FICN) for financing of terrorism and drug financing.
The FICN have their origin in neighbouring country and pose a grievous threat to the security and integrity of the country. Hence the Government has recommended that the withdrawal of the legal tender character of these notes is apposite. GoI advised the Bank to place these matters of immediacy before the Directors of the Central Board of the Reserve Bank of India for consideration…” the note said.
According to RBI’s note, the RBI Central Board met the very next day to “consider the Government’s advice,” and after “deliberations,” decided to recommend to Central Government that the legal tender status of the banknotes in the high denominations of Rs 500 and Rs 1000 be withdrawn.” The Government “considered the recommendations” and decided to withdraw the notes. It was on the same evening i.e. November 8 that Prime Minister Narendra Modi addressed the nation and announced the decision to withdraw the notes effective midnight.
However, 8 days later, during a debate on demonetisation in the Rajya Sabha, Union Minister for Power, Coal, New and Renewable Energy Piyush Goyal said that the decision to demonetise was taken by the RBI Board.
“Reserve Bank ke Board ne yah nirnay liya. Isko Sarkar ke paas bheja aur sarkar ne is nirnay ki sarahna karte hue, cabinet ne ise manjoori di ki paanch sau or hazar ke purane noton ko radd kiya jaaye, naye notes aaye (The Board of Reserve Bank took this decision, sent it before the government and with the government endorsing it, Cabinet gave its nod to it to demonetise the old currency notes of Rs 500 and Rs 1000 and bring new notes),” Goyal had said.
The RBI note under “Background” and “Preparations,” said: “It occurred to Government of India and the Reserve Bank that the introduction of new series of notes could provide a very rare and profound opportunity to tackle all the three problems of counterfeiting, terrorist financing and black money by demonetising the banknotes in high denominations of Rs 500 and Rs 1000 or by withdrawing legal tender status of such banknotes…Though no firm decision was taken initially, whether to demonetise or not, preparations still went on for the introduction of new series notes, as that was needed in any case.”
Interestingly, RBI had a flashback as early as October 7, 2014, when it suggested to the Government the need for introduction of higher denomination notes of value Rs 5,000 and Rs 10,000, keeping in view inflation and the need for “facilitating payments and managing the currency logistics.”
The Government considered the same and after deliberations, advised on May 18, 2016 their “in-principle decision” to introduce Rs 2000-notes.
In lieu of this, RBI on May 27, 2016 recommended to Government that a new series of bank notes with new designs, sizes, colours and themes including notes in the new Rs 2,000 denomination be introduced. The Government gave their final approval on June 7, 2016 and, accordingly, the presses were advised in June 2016 to initiate production of new series notes.
The RBI said that when the stock of new notes printed was reaching a “critical minimum,” the decision to withdraw the legal tender could be made. However, the RBI’s own data in the note shows that as of November 8, 2016 the stock of Rs 2000 notes at the RBI and currency chests was only Rs 94,660 crore, barely six per cent of the total value of Rs 15 lakh crore withdrawn with the demonetisation decision.
Yet, the RBI records in its note that the proposal couldn’t have “come at a more opportune time than coinciding with the introduction of the new series of notes.”
It further justified its decision of siding with the Government, saying that over the last few years, in consultation with the Government, the central bank has been working on introduction of new series of banknotes. It included improving existing security features, adding new design features to “secure our banknotes against counterfeiting.”
It is to be noted that the parliamentary panel led by Moily is set to meet on January 18 when RBI Governor Urjit Patel, representatives of the Ministry of Finance, Department of Economic Affairs, Financial Services and Revenue and representatives of Indian Banks Association (IBA), State Bank of India (SBI), Punjab National Bank (PNB) and Oriental Bank of Commerce (OBC) have been called to depose for a briefing on the subject “Demonetisation of Indian Currency notes of Rs 500 and Rs 1000 and the impact thereof.”
Interestingly, RBI in its note has said that the action’s impact regarding “result in non-availability of these denominations” for the public for transaction and store of value purposes and it “might not immediately be possible to replace these notes fully in terms of both value and volume” on one to one basis, within a specific time was considered.
The RBI, however, claimed that the stock of Rs-2000 notes were arriving in RBI offices and were being despatched to currency chests across the country and that “could enable” meeting a significant “critical portion” of the physical demand therefrom in value terms.
“Besides, electronic means of transaction were expected to take another part of the transaction load hitherto met from physical currency.
Further, the available stock of other denominations at RBI and currency chests would also help meet demand. Further, Rs 500 banknotes in…(New)Series was also being introduced. With these measures in place, it was considered that the transition from old series to new series in the context of withdrawal of legal tender character of Rs 500 and Rs 1000 could be managed.”