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Demonetisation: On Nov 7, it was Murderer of democratic institutions
(Modi) ‘advised’ RBI to ‘consider’ note ban, got RBI nod next day

That’s what RBI says in 7-page note to House panel; agrees with Modi’s rationale to counter ‘FICN menace’.

SO far, Modi has suggested that the decision to withdraw 500-rupee and
1,000-rupee notes came from the Reserve Bank of India. But in its
submission to a Parliamentary panel late last month, the RBI, agreeing
with the Modi’s rationale behind the move, has made it clear that it was
the Government which “advised” it to do so.

“Modi, 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,” said the 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.

WATCH VIDEO | Who Suggested Demonetisation? Was It Government Or Reserve Bank Of India?

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“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.

Read | RBI stance on introduction of new series of notes: ‘A very rare
opportunity to tackle fake notes, terrorist financing and black money’

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, accessed by The Indian Express, 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. That same evening,
Prime Minister Narendra Modi addressed the nation and announced the
decision to withdraw the notes effective midnight November 8.

Eight 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.

In its note, the RBI, under the
heading “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 introduction of new
series notes, as that was needed in any case.”

The RBI recalled
that as early as October 7, 2014, it had 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.

Accordingly, the 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 — when the PM announced the decision —
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.”

Justifying its Board’s decision to agree with the Government, the RBI
note says 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.” In parallel, the note said, the Government of India had
been taking several steps to curb black money and combat terrorism.

The panel headed by Moily meets again 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”.

In
the note to the panel, the RBI also said that it was considered that
action as proposed by Government would “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.

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.”

Initially Demonetisation was
stated to be a surgical operation or strike against Black Money,
Corruption, Counterfeit Currency & weed out terror & drug
financing later it converted to promote cashless transactions further
added to make the country a less cash economy. All these changed based
on the people’s perception on the move. The depositing of Rs 15lakhs in
all citizens accounts is just a bluff.