RBI’s Demonetisation Cross

CThe sequence of events leading to the demonetisation 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 led to November 8, 2016, and understand the role of one of India’s most credible institution, Reserve Bank of India (RBI) in the larger scheme of things.

The central bank has informed the Parliamentary Committee that it acted on the government’s advice on demonetisation. This is at odds with the minister of state of power, coal, new and renewable energy, 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.” RBI cannot make these claims with a straight face. First, it is evident that RBI was grossly unprepared for the move. Second, all three above-stated reasons for demonetisation have been proven false. 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, RBI had stated that the decision to introduce new notes of R2,000 denomination was taken in a meeting on May 19, 2016. However, the minutes of the RBI Board meeting only mention the design of the 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 November 8 to notify the new notes.

On November 8, the prime minister announced the demonetisation of the 500- and 1,000-rupee bills. He also made certain announcements related to dates for exchange of currency notes at banks (December 30, 2016), at RBI counters (March 31, 2016) and withdrawal limits at ATMs/through cheques. Alongside, he mentioned the objectives of demonetisation and the secrecy of the move. He also introduced the 2,000-rupee bill. Indians lauded as this a step towards penalising 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.

Reserve Bank of India, as the issuer of currency, was responsible for replenishing currency in the system. As days passed, 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 RBI was at all prepared for such an act? Or does it indicate that the RBI Board succumbed to external pressures to approve demonetisation? 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 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 a RTI query on disclosure of minutes of the board meeting on the demonetisation decision, citing exemption clause Section 8(1)(g), i.e., endanger(ing) the life or physical safety of any person or identify(ing) the source of information or assistance given in confidence for law enforcement or security purposes. While the intent of demonetisation has been fluid beginning from targeting black money, and counterfeiting to digitising the economy.

Post the demonetisation announcement, RBI disclosed data related to the 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 R12.44 lakh crore. However, it abruptly stopped sharing the data when it seemed imminent that most of the approximately R15 lakh crore of demonetised notes will be returned.

 The increasing opacity of RBI’s role in demonetisation goes against the global trend of increasing monetary policy transparency. We should ask RBI to disclose detailed notes of the minutes of its 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 demonetisation 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.
This article first appeared in Financial Express.
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