RBI admits Government called the shots on demonetisation

Contrary to claims by several Union ministers and popular belief, it was the Government which "advised" the Reserve Bank of India (RBI) to junk ₹500 and ₹1,000 notes on November 7, 2016 and the board of the central bank met the very next day and recommended the demonetisation. And within hours the Union Cabinet is said to have approved the recommendation and the Prime Minister went on national Television to announce the decision.

In a 7-page note to the Parliament's Department-Related Committee of Finance headed by Congress leader M Veerappa Moily, the RBI stated that the Government had 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 ₹500 and ₹1,000."

The letter does not seem to disclose whether the advice was given by the Finance Ministry or the PMO.

Curiously, the RBI's truncated Central Board (only seven of the 10 members are learnt to have attended though the Board ordinarily should have 20 members) did not require any notice for the meeting. It met the very next day to "consider the Government's advice," and after "deliberations( it is not known for how long)," decided to "recommend to the Central Government that the legal tender status of the banknotes in the high denominations of ₹500 and ₹1,000 be withdrawn."

In the note to the panel, RBI said it had been working on introduction of new series of banknotes with improved security features for the past few years to secure them against counterfeiting.

In parallel, the government had been taking steps to curb black money and combat terrorism.

"There were reports by intelligence and enforcement agencies that availability of high denomination banknotes made it easier for black money hoarders and counterfeited notes in high denominations were being used for terrorist financing," RBI 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 ₹500 and ₹1,000 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 note said.

The central bank said it had as early as October 7, 2014 suggested to the government the need for introduction of ₹5,000 and ₹10,000 notes, keeping in mind the inflation and the need for "facilitating payments and managing the currency logistics".

The government, it said, concurred with the introduction of ₹2,000 notes on May 18, 2016 and approved the plan in June when the security presses were instructed to start printing the new high value notes of ₹2,000.

With inputs from PTI.