Govt advised note ban day before PM's announcement: RBI

Mumbai: Contradicting the Modi government, which had asserted that the Reserve Bank of India (RBI) recommended a ban on Rs 500 and Rs 1000 notes, the central bank has said that it was the government which advised it to do so, as late as November 7, the day before the note ban was announced by Prime Minister Narendra Modi.

According to a report in The Indian Express, in a submission to a Parliamentary panel late in December, the RBI in a 7-page note said that, “Government, on 7th November, 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.”

Backing the government’s move, the note added that, “Elimination of black money will eliminate the long shadow of the ghost economy and will be positive for India’s growth outlook.”

Fake Indian Currency Notes (FICN) are being used for terror and drug financing, and demonetisation is an effort to curb this, the RBI note said according to the report.

The RBI Central Board met the very next day (i.e November 8) 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to Central Government that the legal tender status of the banknotes in the high denominations of Rs 500 and Rs 1000 be withdrawn, said the note.

Union Minister for Power Piyush Goyal had however claimed on November 16 during a debate on demonetisation in Parliament that the RBI Board of Directors had taken the decision to demonetise Rs 500 and Rs 1000 notes.

However, the decision to demonetise was originally not on the cards, says the report. The RBI had recommended to the government introduction of Rs 5000 and Rs 10000 notes as early as November 2014. In May 2016, the government ‘in principle’ agreed to introduce notes of Rs 2000. However, at this stage, there was no talk of withdrawing Rs 500 and Rs 1000 currency from the market, said the report.

There was no discussion on the issue even as late as July or August, said the report.

The RBI said that when the stock of new Rs 2000 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, when the PM announced the decision to demonetise, 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.