Long Live The RBI

The sequence of events leading to the demonetization move are becoming more convoluted as more information is revealed. At this point, it is starting to resemble a comedy of errors at best and an insidious plot at worst. We attempt to delineate the sequence of events that have led to November 8, 2016 and understand the role of one of India’s most credible institution, Reserve Bank of India in the larger scheme of things.

The Central Bank has informed the Parliamentary Committee that they acted on the government’s advice on demonetization. This is at odds with the Minister of State of Power, Coal, New and Renewable and Energy, Mr. Piyush Goyal’s remarks in the Rajya Sabha. He said that the government merely approved the RBI Board’s decision.

The RBI note to the Parliamentary Committee says 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 demonetizing the banknotes in high denominations… Though no firm decision was taken initially, whether to demonetize or not, preparations still went on for introduction of new series notes, as that was needed in any case.”. The RBI cannot make these claims with a straight face. Firstly, it is evident that the RBI was grossly unprepared for the move. Secondly, all three above stated reasons for demonetization have been proven to be false. The RBI has itself stated that there are no additional security features in the new notes so the problem of counterfeiting will persist. Finally, several people, including terrorists have already been caught, possessing crores of new currency notes.

In a separate RTI response, the RBI had stated that the decision to introduce new notes of INR 2,000 denomination was taken in a meeting on 19 May 2016. However, the minutes of the RBI board meeting only mention the design of new notes. As per the RBI Act, it is mandated to reveal the decision to introduce the new notes which it did not. Similarly, the government waited till 8 November to notify the new notes.

On November 8, The Prime Minister of India announced the demonetization of INR 500 and INR 1,000 bills. He also made certain announcements related to dates for exchange of currency notes at banks (Dec 30, ‘16), at RBI counters (Mar 31, ’16) and withdrawal limits at ATM/cheque. Alongside, he mentioned the objectives of demonetization and secrecy of the move. He also introduced a INR 2,000 bill in the system. Indians lauded as this a step towards penalizing the growing breed of corrupt and extinguishing the existing stock of black cash in the economy. Consequences of sucking out 86% of the currency included long queues at banks, malpractices at bank branches, and attenuated consumption but the nation has stood by the decision believing in the intent of the act.

The Reserve Bank of India as the issuer of currency was responsible for replenishing currency in the system. As days passed, the RBI issued multiple notifications on how, why and who could withdraw how much currency. At last count, in a 50-day period the RBI issued 74 such notifications. This is astounding agility for any Central Bank and raises questions if the RBI was at all prepared for such an act? Or does it indicate that the RBI board succumbed to external pressures to approve demonetization? If RBI is an independent regulator, insulated from all political influence and could not see itself implementing the move, there is little reason why it did not refuse to be an accomplice. And finally, if the RBI’s economic talent pool was on ground with this, cognizant of leaving a nation with 15% of the currency in circulation, the citizens have a right to know the reasoning.

The institution denied RTI query on disclosure of minutes of the board meeting on demonetization decision citing exemption clause Section 8(1)(g) i.e. endanger the life or physical safety of any person or identify the source of information or assistance given in confidence for law enforcement or security purposes. While the intent of demonetization has been fluid beginning from targeting black money, and counterfeiting to digitizing the economy.

Post the demonetization announcement, RBI disclosed data related to receipt of old currency on a daily basis. Regular reporting of data, in line with the ethos of the institution was appreciated by the public. According to the last disclosure made on December 12, 2016, RBI had received INR 12.44 lakh crore. However, it abruptly stopped sharing the data when it seemed imminent that most of the approximately INR 15 lakh crore of SBNs will be returned.

The increasing opacity of RBI’s role in demonetization goes against the global trend of increasing monetary policy transparency. We should ask the RBI to disclose detailed notes of the minutes of Central Board meeting. As of now, there is no clarity on the nature of background work undertaken by RBI to assess the move and the institution’s conviction to go ahead and implement the same. It is unfortunate that the very custodian of demonetization is unable to exonerate itself by coming out with reliable facts, that would convince the common man and investors alike, of its intentions and independence. If policymakers have decided to operate in secret, then we should consider amending our constitution to reflect that the government is not responsible to the people.